FDI Impact and Spillover: Evidence from China's Electronic and Textile Industries

Abstract

M ULTINATIONAL Corporations (MNCs) may invest in a host country when they possess ‘non-tangible productive assets’ that cannot be easily licensed but can be transferred within the firm. Direct equity participation in the host country is therefore required for MNCs to reap the rents from their nontangible productive assets, which may include technological know-how, marketing and managing skills, relationships with suppliers and customers, and reputation. If foreign direct investment (FDI) does effectively convey these assets, we should expect FDI to boost the productivity of the host country firms that receive FDI. A more complex issue is the indirect spillover effects of FDI to non-FDI domestic firms. To the extent that FDI may bring new products and technologies to the host country, non-FDI receiving domestic firms may also stand to benefit from FDI through personnel turnover, demonstration effects and knowledge spillovers. The presence of FDI in a certain industry, however, may exert adverse effect on domestic firms in that industry. By enjoying better technologies and lower production costs, firms with FDI may cut into the market share of domestic firms without FDI. In a short run imperfectly competitive market structure, the productivity of domestic firms may be reduced when sales fall, so that fixed costs are spread over fewer units. In the long run, however, the increased competition induced by the increased presence of FDI in domestic industries may force