Absorptive capacity and benefits from FDI: Evidence from Chinese manufactured exports

Abstract

China's global export rank rose from the 32nd in 1978 to the 1st in 2009, and in the same period China had been a top recipient of foreign direct investment (FDI) in the world. Does large FDI inflow automatically lead to the export boom? Or is it a must for China to have certain absorptive capacity (AC) given FDI? This work investigates how manufacturing exports (MX) are affected by the AC-FDI interaction. MX performance is assessed by three indicators: export capacity, export intensity, and export quality. AC is defined as a host-country's ability to capture potential benefits from FDI, and such ability is proxied by government FDI policy, human capital, R&D, and infrastructure. Estimates are conducted with the data on 21 manufacturing sectors for 31 regions over 8years (2005–2012). We find that (a) AC is necessary condition for China to benefit from FDI in MX, and contributions of FDI alone to MX are limited; (b) China's strong AC largely comes from well-designed FDI policy and high quality infrastructure, both of which complement with FDI in strengthening export capacity, intensity and quality; and (c) human capital and R&D seems to be more helpful for China to capture spillovers from FDI to export quality.