The impact of foreign ownership, local ownership and industry characteristics on spillover benefits from foreign direct investment in China

Abstract

This paper finds that significant variation in FDI spillover effects on local industry is obscured through the aggregation common in most studies. Breaking Chinese industrial data for 2001 down by category of ownership of foreign investor, local firm, and by host industry, we find evidence of greater positive spillovers from FDI in technology-intensive industries than in labour-intensive industries. We also find that overseas Chinese affiliates from Hong Kong, Macau and Taiwan (HMT) generate spillovers to locally owned enterprises (LOEs) in labour-intensive industries, in contrast to western affiliates, which positively impact on the performance of LOEs in technology-intensive industries. Chinese state-owned enterprises (SOEs) benefit from the presence of both HMT affiliates in labour-intensive industries and of western affiliates in technology-intensive industries. Other LOEs (OLOEs), however, benefit only from HMT affiliates’ presence in labour-intensive industries. These findings offer some support to host government policies offering generous incentive packages to attract foreign investors in high-technology industries. We find that some aspects of China's status as a transition economy—for example the considerable resources and effective control deployed by the state and SOEs—has helped its development process; however we argue that it is possible for non-transition developing economies to implement similar policies.