Is the Relationship between Inward FDI and Spillover Effects Linear? An Empirical Examination of the Case of China

Abstract

This paper finds evidence for the coexistence within Chinese manufacturing industry of both curvilinear and linear relationships between inward foreign direct investment (FDI) and the productivity of locally owned enterprises (LOEs). This complexity of spillover effects challenges the laissez-faire view that all inward FDI into all types of domestic industry is equally valuable in terms of productivity spillover benefits. Our findings suggest that inward FDI into China leads either to spillovers that decline beyond a critical point, or to effects that continue linearly, depending on the ownership of foreign investors and the technological characteristics of the industry concerned. Our analysis yields original insights into the complex pattern of spillover effects from FDI into China, and deeper understanding of its possible causes. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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