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Trading market access for technology? Tax incentives, foreign direct investment and productivity spillovers in China

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  • Deng, Ziliang
  • Falvey, Rod
  • Blake, Adam

Abstract

Tax incentives have been adopted worldwide to attract foreign direct investment (FDI) and its superior technology. However whether tax incentives can promote FDI productivity spillovers remains unknown. We develop a static computable general equilibrium (CGE) model of China to explore it. The results suggest that abolishing differential tax system leads to weaker FDI spillovers in the short term. Nonetheless, the reform lifts up the productivity entry threshold for foreign firms, and the surviving domestic firms become more productive and thus more capable of absorbing productivity spillover.

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  • Deng, Ziliang & Falvey, Rod & Blake, Adam, 2012. "Trading market access for technology? Tax incentives, foreign direct investment and productivity spillovers in China," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 675-690.
    • Handle: RePEc:eee:jpolmo:v:34:y:2012:i:5:p:675-690
    DOI: 10.1016/j.jpolmod.2012.01.003
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    More about this item

    Keywords

    Tax incentives; Foreign direct investment (FDI); Productivity spillovers; Computable general equilibrium (CGE) modeling;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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