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Do Institutions Matter for FDI Spillovers? The Implications of China’s “Special Characteristics”

Luosha Du (), Ann Harrison () and Gary Jefferson
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Luosha Du: University of California, Berkeley

No 33, Working Papers from Brandeis University, Department of Economics and International Businesss School

Abstract: We investigate how institutions affect productivity spillovers from foreign direct investment (FDI) to China’s domestic industrial enterprises during 1998-2007. We examine three institutional features that comprise aspects of China’s “special characteristics”: (1) the different sources of FDI, where FDI is nearly evenly divided between mostly Organization for Economic Co-operation and Development (OECD) countries and the region known as “Greater China”, consisting of Hong Kong, Taiwan, and Macau; (2) China’s heterogeneous ownership structure, involving state- (SOEs) and non-state owned (non-SOEs) enterprises, firms with foreign equity participation, and non-SOE, domestic firms; and (3) industrial promotion via tariffs or through tax holidays to foreign direct investment. We also explore how productivity spillovers from FDI changed with China’s entry into the WTO in late 2001. We find robust positive and significant spillovers to domestic firms via backward linkages (the contacts between foreign buyers and local suppliers). Our results suggest varied success with industrial promotion policies. Final goods tariffs as well as input tariffs are negatively associated with firm-level productivity. However, we find that productivity spillovers were higher from foreign firms that paid less than the statutory corporate tax rate.

Pages: 64 pages
Date: 2011-04, Revised 2012-09
New Economics Papers: this item is included in nep-cse, nep-dev, nep-eff, nep-sbm and nep-tra
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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP33.pdf First version, 2011 (application/pdf)
http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP33R.pdf Revised version, 2012 (application/pdf)

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