Hold Your Enemies Closer: In Search of Positive Impacts of Horizontal Foreign Direct Investment on Domestic Firms

Existing studies have often failed to find positive impacts of horizontal FDI on domestic firms. We argue that the two effects underpinning the impacts of horizontal FDI (i.e., the positive spillover effect and the negative competition effect) have different degrees of attenuation with geographic distance. As FDI is often distributed unevenly across space, studies that do not account for the geographic distance between domestic firms and foreign multinationals are prone to obtain inconclusive results. Using annual surveys of China’s manufacturing firms for the period of 1998-2005, we formally account for the geographic distance between domestic firms and foreign multinationals, and find that domestic firms benefit from the presence of foreign multinationals located nearby but suffer from those located in more distant