Horizontal and vertical spillover effects of foreign direct investment in Chinese manufacturing

Horizontal and vertical spillover effects of foreign direct investment in Chinese manufacturing Purpose – The purpose of this paper is to examine foreign direct investment (FDI) spillovers accruing to Chinese local industry at both intra‐ and inter‐industry levels and how such effects vary with the nationality of the investor. Design/methodology/approach – A panel dataset for Chinese industry over the period 2000‐2002 is employed for an augmented production function with external factors being defined as the influences of externalities in production. Findings – The paper provides evidence of positive spillovers working both within industries and between industries, and evidence of vertical effects being more important than horizontal effects. The results also show that Western multinational enterprises (MNEs) generate more vertical spillovers than their overseas Chinese counterparts. This latter finding confirms that it is necessary to break down inward FDI by foreign ownership, as this makes a significant improvement over previous findings. Research limitations/implications – Owing to data constraints, the design of the empirical framework does not allow a tightly defined source of potential vertical spillovers, i.e. a distinction of vertical spillovers through backward or forward linkages. Practical implications – Given the strong evidence of vertical spillovers, the role of foreign MNEs in bringing local suppliers up‐to‐date with best practices should be counted amongst the policy benefits when judging whether it is appropriate to provide policy incentives to FDI. Policy effectiveness could be maximized at targeting specific types of foreign investor. Originality/value – The paper assesses the relative importance of horizontal and vertical spillovers in a unified framework and the role of nationality of the investor. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Chinese Economic and Foreign Trade Studies Emerald Publishing

Horizontal and vertical spillover effects of foreign direct investment in Chinese manufacturing

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
1754-4408
DOI
10.1108/17544400810854469
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to examine foreign direct investment (FDI) spillovers accruing to Chinese local industry at both intra‐ and inter‐industry levels and how such effects vary with the nationality of the investor. Design/methodology/approach – A panel dataset for Chinese industry over the period 2000‐2002 is employed for an augmented production function with external factors being defined as the influences of externalities in production. Findings – The paper provides evidence of positive spillovers working both within industries and between industries, and evidence of vertical effects being more important than horizontal effects. The results also show that Western multinational enterprises (MNEs) generate more vertical spillovers than their overseas Chinese counterparts. This latter finding confirms that it is necessary to break down inward FDI by foreign ownership, as this makes a significant improvement over previous findings. Research limitations/implications – Owing to data constraints, the design of the empirical framework does not allow a tightly defined source of potential vertical spillovers, i.e. a distinction of vertical spillovers through backward or forward linkages. Practical implications – Given the strong evidence of vertical spillovers, the role of foreign MNEs in bringing local suppliers up‐to‐date with best practices should be counted amongst the policy benefits when judging whether it is appropriate to provide policy incentives to FDI. Policy effectiveness could be maximized at targeting specific types of foreign investor. Originality/value – The paper assesses the relative importance of horizontal and vertical spillovers in a unified framework and the role of nationality of the investor.

Journal

Journal of Chinese Economic and Foreign Trade StudiesEmerald Publishing

Published: Jan 25, 2008

Keywords: International investments; China; Inward investment; Multinational companies; Manufacturing industries

References

  • Do domestic firms benefit from direct foreign investment? Evidence from Venezuela
    Aitken, B.; Harrison, A.E.
  • Backward vertical linkages of foreign manufacturing affiliates: evidence from Japanese multinationals
    Belderbos, R.; Capannelli, G.; Fukao, K.
  • The relationship between inward foreign direct investment and the performance of domestically‐owned Chinese manufacturing industry
    Buckley, P.J.; Clegg, J.; Wang, C.
  • Vertical inter‐firm linkages in LDCS: an empirical study
    Lall, S.

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