The local technology spillovers of multinational firms

Abstract

This study examines how innovation by U.S. multinational firms affects the productivity of domestic Chinese firms in the same counties as the U.S. subsidiaries. After manually matching U.S. multinational firms with their manufacturing subsidiaries in China, I use citation-weighted patent stock to measure U.S.-produced external knowledge in Chinese counties and employ an instrumental variable strategy based on U.S. R&D tax credit policies to address potential endogeneity concerns. Findings suggest that innovation by U.S. multinational firms improves the productivity of domestic Chinese firms co-located with their subsidiaries, indicating a local technology spillover effect. Domestic firms with high-wage workers, high innovation capacity, and private ownership are better equipped to absorb these spillovers. In addition, domestic firms in industries with closer technological ties to U.S. multinational firms benefit more from their innovation, suggesting that technological proximity amplifies the spillover effect.