The contribution of outward direct investment to productivity changes within China, 1991-2007

There has been a marked growth in recent years in outward direct investment (ODI) by developing countries, and in particular, by China. Previous studies have examined the impact on developing countries productivity of foreign direct investment (FDI) from developed countries. This paper looks at the effects of China's outward direct investment on growth in its own productivity, and at two specific reasons for this growth: technology sourcing and improvements in efficiency. These are examined using data from China's ODI in eight developed countries during the period 1991 to 2007. It appears that Chinese outward direct investment has had beneficial spill-over effects in improving total factor productivity growth over the period of the study, and that gains in efficiency have been the chief reason for this. Our vector auto regression (VAR) decomposition analysis also suggests that domestic R&D capital stocks are the most important source of productivity growth with greater contribution to technological progress. China is likely to continue to expand its ODI and it will be interesting to see whether the productivity gains continue at the same rate, and whether other developing countries also increase their ODI and reap the same benefits.