Productivity Spillovers from Foreign Direct Investment: Evidence from Firm-Level Data in China

Using firm-level census data, this paper examines the spillover effects of foreign direct investment (FDI) on domestic firms in the Chinese manufacturing industry between 2000 and 2003. We find that FDI has a significant positive spillover on industry productivity that decreases as the share of FDI in the industry increases. These positive spillovers are more likely to occur through forward linkage (where domestic firms purchase high-quality intermediate goods or equipment from foreign suppliers) than through backward linkage (where firms produce goods for foreign multinationals). Entering and exiting firms receive greater benefits from both horizontal and vertical productivity spillovers than existing firms. Benefits are also highest in large, non-exporting and non-SOE firms. Our evidence suggests that domestic firms differ significantly in the extent to which they benefit from FDI according to firm structure as well as the source of FDI.