Empirical analysis on the negative technology spillover effect of foreign direct investment in China

Abstract

Summary Drawing upon data collected in 37 industries in China between 1998 and 2003, this empirical study examines the degree to which three factors—size of technological gap, absorptive capability, and technological intensiveness—influence a “negative spillover effect” in reaction to foreign direct investment. The results of our study demonstrate that the size of the technological gap between the local industry and the foreign invested companies does not affect the foreign direct investment's capability to produce a “negative spillover effect.” However, there is a significant correlation between each of the other two factors, namely, absorptive capacity and technological intensiveness, and the negative spillover effect. That a large absorptive capacity of local firms in a technologically intensive industry can have a moderating effect on any negative spillover effect is obvious. However, as the absorptive capacity of the local industry and the technological intensiveness of the industry decline, this moderating effect becomes statistically insignificant. This study then demonstrates that the ability for local industries to catch up depends on the domestic firm's participation in the process of technological innovation and improvement. To overcome technological dependence in high‐technology industries, domestic firms have to strengthen their technological absorptive capacity and their own innovative capabilities.