Foreign Direct Investment and Technology Spillovers in China's Manufacturing Sector

Abstract

This article explores the technology spillovers of foreign direct investment (FDI) in China's manufacturing sector in 2003. Using a simultaneous equation model estimated over a comprehensive firm-level data set, we find that foreign direct investment in China generates significant and positive technology spillovers to domestic firms, with a 1 percent increase in foreign presence promoting labor productivity of domestic firms by more than 5 percent. The substantial positive spillovers not only justify, to some extent, China's FDI policy setting, but also indicate that China is likely to continue to benefit from attracting more FDI inflow in the future.