An Essay On Absorptive Capability And Technology Spillover Of Foreign Direct Investment

Even though great achievement has been made in China in terms of attracting foreign direct investment (FDI) since its reform and opening-up, it has been widely argued about the impacts of foreign investments on China's economic and social development, among which whether there exists technology spillover effects of FDI on domestic firms in China is definitely a key one, since it has been considered the essential reason why so many developing countries are eager to attract foreign investors nowadays. A policy of so-called "market for technology" has been implemented in China for a long period, however, the outcome of such a policy has been generally suspected by empirical researches. This dissertation is aiming at investigating the determinants of FDI's technology spillover effects towards domestic firms, from a brand-new perspective of host country's absorptive capability.Such a hypothesis that there exist spillover effects of FDI on China's domestic firms is first proposed in this dissertation; however, results based on co-integration and vector error correction tests demonstrate that although there is a relative productivity advantage of foreign-invested firms against domestic ones, it hasn't mean that domestic firms have benefited from technology spillovers of FDI which may result from such productivity difference.Such a phenomenon is further discussed based on host country's absorptive capability towards technology spillovers, which widely includes technological capability of domestic firms, human capital accumulation, efficiency of financial market, degree of industrial linkage between foreign firms and domestic ones, degree of openness and intellectual property rights protection in host country. To show the mechanism how technology spillover essentially depends on host country's absorptive capability, an endogenous growth model based on R&D-driven growth model of variety extension, first proposed by Romer (1990), has been extended towards an open economic version which includes such key variables as FDI, technology spillover and absorptive capability. The competitive equilibrium analysis reveals that absorptive capability truly determines technology spillovers and hence steady-state growth rate, and the improvement of matching degree between foreign firms' production and host country's factor endowment only has short-term output effect instead of long-term growth effect.Application of absorptive capability theory has also been made into China'seconomy. Firstly, by introducing adaptive expectation into the original Feder (1982)'s two-sector model, we establish a dynamic two-sector model to analysis the lagged effects of technology spillover. Empirical results demonstrate that absorptive capability, measured by human capital accumulation, well explains the changes of technology spillover effects; in the meanwhile there exists a dual effect of technology gap on technology spillover. A further empirical test based on impulse response function points out the fact that the duration of response of technology spillover towards a unit deviation standard shock of absorptive capability is much persistent than towards that of technology gap. Secondly, the results based on a panel data analysis of 30 China's provinces' data during the period of 1996~2002 also support the determinant role of absorptive capability, and it further reveals that the relative shortage of human capital accumulation in China's eastern regions is the key variable that restraint the improvement of their absorptive capability, while for middle-western regions the degree of openness is urgently required to be enhanced. Conclusions and policy implications have also been made finally.