Does foreign direct investment improve the productivity of domestic firms? Technology spillovers, industry linkages, and firm capabilities

This paper explores how industrial linkages, firm capabilities, and the geographic location of domestic firms affect the diffusion of technology brought by foreign direct investment. I hypothesize that local firms are more likely to improve efficiency when they receive better product inputs from foreign suppliers and technology support by foreign customers, and such transfer of knowledge is more effective when the recipient has high absorptive capacity and is located near the source of knowledge. Empirical test using China’s manufacturing firms finds positive productivity spillovers between foreign suppliers and their domestic customers. However, there is no positive spillovers from foreign-owned customers or competitors. Domestic firms’ in-house R&D capital facilitates learning from foreign firms. Local firms learn from both joint ventures and wholly-owned foreign subsidiaries and the effects are larger from wholly-owned subsidiaries.