FDI Inflow's Spillover Effect On Chinese Domestic Firms

With over 20 years'sustainable development, China's economy has made tremendous development. In 2008, China's recorded RMB 30trillion in total GDP, overtaking Germany as the world's third largest economy. FDI (Foreign Direct Investment) has played an important role in making up for capital shortage, improving technology of domestic enterprises, promoting exports and enhancing residential income. It is important to note that given China's current economic power and strength, attracing more foreign capital should not be taken as the primary consideration. The primary consideration should be improving domestic technology standard, optimizing China's econmic structure, and enhancing competitive competence. More efforts should be made to encourage technology transfer and spillover. Accordingly, the research on spillover effect of FDI inflow carries much relevance.In reviewing previous literature and based on census of Chinese manufacturing enterprises conducted by China's National Bureau of Statistics during 2000-2003, the paper makes empirical analysis of spillover effect of FDI inflow on China's domestic sectors, of impact of FDI inflow on export and welfare of domestic enterprises. FDI spillover effect can be categorized into inter-industry and intra-industry spillovers. Previous literature has only demonstrated significant inter-industry spillover effect, but fails to produce distinct intra-industry spillover effect, partly due to limits of sampled data, partly due to inappropriate measurement methodology. Accordingly, as for empirical studies, the paper uses non-balanced enterprise-level panel data to address selection bias. Meanwhile, such techniques as semi-parameter techniques, instrumental variables techniques, fixed-effects model are adopted to address simultaneity bias and endogeneity bias emerged from previous measurement. Conclusions are as follows:Firstly, there is distinct positive intra-industry spillover of FDI inflows to China's domestic enterprises, but the relationship between FDI inflows and the spillover effect is not linear, rather an inverted U. With increasing FDI inflows, its positive marginal spillover effect is on the decline, together with increasing crowding-out effect among domestic enterprises, and eventually positive spillover could turnout to be negative. The empirical study of this paper based on enterprise data of 2000-2003 shows that the spillover effect of FDI inflow on China's manufacturing industry is still far from reaching the critical mass of turing from postive to negative, suggesting that foreign direct investment is expected to continue to have positive spillover effect on domestic enterprises, in other words the productivity of domestic enterprises will continue to benefit from FDI inflows. It is interesting to note that thanks to maybe close culture and customs. FDI inflow from Hong Kong, Macao and Taiwan demonstrates more evident spillover effect.Secondly, the impact of FDI on exports of domestic enterprisese can be categorized into intra-industry FDI impact, upstream FDI impact and downstream FDI impact. The paper concludes that despite intensifying competition, FDI inflow stimulates domestic enterprises to increase export to foreign-funded enterprises through interaction between upstream and downstream and to a certain extent makes them more export-oriented in the following aspects:FDI intensifies competition and imposes negative or crowding out impact on export of domestic enterprises within the same sector. Meanwhile, FDI may stimulate domestic upstream and downstream sectors to increase export, in particular upstream sectors, suggesting more distint backward FDI impact. In terms of specific type of enterprises, the study shows more distinguished FDI impact on non-public sectors, partly may due to more flexible machnism and higher market sensivity of private enterprises, as well as better response and learning capacity, which makes it easier for them to respond to FDI spillover effect. Meanwhie, the study suggests more FDI influence on exports activity on the part of enterprises with higher productivity and focus on new products.Thirdly, it is found that FDI has been significantly promoting job opportunities. But relatively speaking, FDI creates less jobs for domestic enterprises, partly may due to the fact that foreign-funded enterprises at the same time produce relevance effect and more competition. Meanwhile it is clear that FDI increases salaries of domestic enterprises, since foreign-funded enterprises bring in more labor demand and intensifies labor market competition. Given higher productivity and salaries on the part of foreign-funded enterprises, employee turnover between foreign and domestic enterprises also increases salaries.Among the factors determining FDI spillover effect, except for technological aspect, China's economy and absorbing capacity of domestic enterprise matter more, which in turn depends on China's labor cost, technical base, economic openness, industrial concentration, relevant policies and efficiencies of financial market. Accordingly, the paper makes two proposals for FDI policy consideration:first, more preference should be given to technology transder; second, more efforts should be made to enhance absorbing capacity on the part of domestic enterprises.