Abstract
Using a set of panel data of 11,324 firms in China from 1996 to 1999, the paper finds that positive technology spillovers from FIEs to domestic firms occur through tangible assets rather than intangible assets, through domestically consumed products rather than exported products, through ‘traditional’ products rather than new products, and through FIEs employing unskilled workers rather than FIEs employing skilled workers. FIEs are found to generate negative spillovers through exports and through employment of skilled workers.
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Notes
In general terms, foreign-invested enterprises include mainly wholly foreign-owned enterprises and international joint ventures. In China, international joint ventures include both equity joint ventures and cooperative joint ventures.
The author thanks an anonymous referee who pointed out this problem, and wrote: ‘The fact that in the FDI spillovers literature spillovers have in the past almost exclusively been treated as a black box has always been a major shortcoming of the literature.’
So far, there have been no arguments against the positive linkage effect.
According to the China National Bureau of Statistics, intangible assets include patents, trade marks, copyrights, etc. As pointed out by an anonymous referee, there could be problems with the Chinese accounting system. Intangible assets of FIEs might be, for instance, developed largely outside China because of concerns over intellectual property protection. For tax reasons, furthermore, FIEs might report intangibles in the accounting statements of other subsidiaries rather than on their books in China. Unfortunately, however, the China National Bureau of Statistics does not provide an explanation about how intangible assets in FIEs are calculated in China.
This treatment does mean, however, that the estimate may be biased, as the error term will consist in part of the non-included spillover types, which, as argued, are highly correlated with the included one. Unfortunately, there is no real way around this, and probably the separate variables are more informative than estimation with the full set of proxies. The author thanks an anonymous referee for pointing this out.
For confidentiality reasons, the China National Bureau of Statistics did not provide the identifiers of the firms.
See the Appendix for detailed definition of these variables.
Of course, as pointed by an anonymous referee, there is a possibility that there are no spillovers at all (positive or negative), which would be the case if no spillovers were found in the products and employment of FIEs at the disaggregate level.
The finding appears to be, as pointed out by an anonymous referee, contrary to findings in some other studies. Aitken et al. (1997) and Greenaway et al. (2004) found, for instance, that the exports from foreign firms help to increase the export orientation of domestic firms (and thus presumably the productivity of domestic firms). Some explanations for the seemingly different empirical findings were actually provided by the aforementioned researchers. First, as Greenaway et al. (2004: 1037) pointed out, ‘although the export experience of foreign firms may influence whether or not domestic firms export, it does not appear to have a significant impact on export intensity’ of domestic firms. That is, the positive spillover effects from exports of foreign firms on domestic firms’ export orientation are, at most, minimal. Second, domestic firms have to be located close to foreign firms in order to learn from their export experience. In China, however, the government established export processing zones (EPZs) and special economic zones to attract foreign investment, which have been, as Aitken et al. (1997: 128) pointed out, ‘located in regions that are removed from domestic production centres’. This is probably the most important reason why exports of foreign firms have no positive spillover effects on domestic firms in China. On the contrary, foreign firms compete with domestic Chinese firms in the international market, and thus have a negative market-stealing effect. Indeed, foreign-invested enterprises accounted for more than 50% of China's exports in recent years, indicating that they have indeed crowded domestic firms off exporting and thus, as shown in this study, have negatively affected their productivity. The finding of this study thus has significant policy implications.
This is a very important finding. As pointed out by an anonymous referee, prior ‘studies that have measured FDI in terms of MNEs’ employment share appear to find positive spillovers more readily than (prior) studies that have measured (FDI in terms of) MNEs’ share of output or other proxy variables (Görg and Strobl, 2001).’ All these prior studies did not, however, distinguish between the employment of skilled workers and the employment of unskilled workers. After making the distinction, the present study finds that the employment of unskilled workers by foreign firms has a positive spillover effect, but the employment of skilled workers by foreign firms has a negative skill-stealing effect. The distinction between skilled and unskilled employment has never been made in prior studies, and it is a unique contribution of this study.
Tangible assets account for about 90% of the total capital of the firms in the sample.
The author thanks an anonymous referee for pointing out the issue of technology gap, and this section is based upon comments made by the referee.
The author would like to thank an anonymous referee for pointing out this possibility. By survival bias, the referee means a possibility that negative spillovers occur shortly after foreign investment is initiated, when those firms that cannot compete are forced out of the industry. In contrast, positive spillover effects appear to occur over a longer period of time among firms that survive the initial shock of FDI. As the data on the timing of entry of foreign firms in individual industry sectors are not available, we cannot test the survival bias hypothesis in this study.
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Acknowledgements
We thank Professor Arie Y Lewin (Editor-in-Chief), Professor Raj Aggarwal (Departmental Editor), Danielle Trojan (Managing Editor), and three anonymous JIBS referees for valuable guidance and comments. We also thank CNSB for providing the dataset, Wenjun Li for assistance in data processing, and Jenny Hill and Samantha Lancashire for proofreading.
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Accepted by Raj Aggarwal, Departmental Editor, 13 May 2004. This paper has been with the author for three revisions.
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Tian, X. Accounting for sources of FDI technology spillovers: evidence from China. J Int Bus Stud 38, 147–159 (2007). https://doi.org/10.1057/palgrave.jibs.8400245
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DOI: https://doi.org/10.1057/palgrave.jibs.8400245