Gravity of intermediate inputs in productivity spillovers: Evidence from foreign direct investment in China

Abstract

AbstractThe literature on the effect of multinational firms on the productivity of domestic firms has received wide attention; however, the exact channel of productivity spillover at a more micro firm level is underexplored. Based on a multisector production model, we examine heterogeneous productivity spillovers through the channel of upstream foreign direct investment (FDI) inputs at the firm level. We construct a firm‐level distance statistic for the upstream FDI and estimate the gravity of inputs: A firm is more productive if it gains access to more FDI inputs (general productivity‐enhancing effect) and is geographically closer to upstream FDI firms (proximity effect). We find in the 2000–2007 Chinese firm data that (i) if a domestic firm’s FDI input share increases by 1 percentage point, then its productivity is increased by 2.02%, and (ii) if the firm’s distance from upstream FDI firms is 10% greater, then its productivity is reduced by 0.59%. The results are robust after controlling for FDI firm location selection bias and other productivity spillover channels.