The ‘insider’ and ‘outsider’ effects of FDI technology spillovers: Some evidence

Abstract

Extant studies on FDI technology spillovers have reached inconclusive findings, indicating that the effect of FDI technology spillovers is likely to be contingent on a variety of factors. The present paper argues that one of the likely contingent factors is the distinction between FDI as an insider and FDI as an outsider to individual domestic firms. For instance, FDI in industry A is considered as insider FDI by domestic firms in industry A, but outsider FDI by domestic firms in industry B. Similarly, FDI in location X is considered as insider FDI by domestic firms in location X, but outsider FDI by domestic firms in location Y. Most extant studies failed to make this distinction. To fill this research gap, the present paper distinguishes industrial outsider FDI technology spillovers from industrial insider FDI technology spillovers on the one hand, and regional outsider FDI technology spillovers from regional insider FDI technology spillovers on the other. The study develops hypotheses, and tests them against firm-level data of the National Industrial Enterprise Survey compiled by the China National Bureau of Statistics. The paper finds that FDI as an industrial insider as well as a regional insider tends to produce positive technology spillovers, whereas FDI as an industrial outsider as well as a regional outsider tends to produce negative technology spillovers. In particular, FDI located in the advanced coastal region tends to adversely affect the productivity of domestic firms located in the interior region no matter whether or not the domestic firms are located in the same industry as the FDI. The patterns of FDI technology spillovers help explain the radical industrial upgrading associated with FDI in China, especially the rise of industries with substantial FDI inflows such as electronics, home appliance, and automobile in recent decades. The patterns of FDI technology spillovers also help explain the widening regional gap between the advanced East Coast region with substantial FDI inflows and the backward Inland region with limited FDI. Findings of the study have important implications for both managers of multinationals and the government of transition economies. While investing in rising industries, multinationals need to consider investing in these industrial sectors in the backward region of transition economies. While facilitating industrial upgrading, the government of transition economies should formulate effective policies to encourage multinationals to invest in rising industries in the backward region.