Technology-seeking Foreign Direct Investment And Reverse Technology Spillover Effect

With the acceleration of economic globalization, outward foreign directinvestment (ODI) becomes an important way for multinational enterprises (MNEs) totake part in the global economic integration. As the world’s largest emerging economy,China has aroused worldwide attention for its new identity as the main foreigninvestor. China has been one of the largest destinations of foreign investment, andgradually become an increasingly important source of investment outflow into theworld. Although benefited from years of foreign investment, Chinese enterprises arenow facing increasingly fierce competition and lower profits. What is worse, thelong-term development and industrial structure adjustment of Chinese enterprises arerestricted by the lack of core technology. When it comes to advanced technology,companies in China still have a significant gap with those in developed countries. Tocatch up with the developed countries inquires the developing countries to narrowdown the technology gap. And the technology-seeking ODI is an effective way tobreak the technical bottleneck of industrial development constraints, learn advancedtechniques, and get reverse technology spillover. As the global economy becomesincreasingly open, it is of great strategic significance and practical value to explorethe way of enhancing domestic technological innovation capability and promotingdomestic technological progress through technology-seeking ODI.As the process of global economic integration is accelerating, the main body ofMNEs embodies new features and demonstrates an ODI pattern led by companies withno technical advantages. Under such circumstances, this paper analyzes the influencesof such ODI on China’s Go Out policy. First, by reviewing the literatures concerningforeign direct investment, especially those related to technology-seeking ODI. Next,we study the developmental trajectories of technology-seeking foreign investment. Bymeasuring the proportion of ODI outflow of developing countries to that of the world,we prove that ODI plays a more and more active role in developing economies. China,as an emerging source of ODI, also shows strong vitality. Furthermore, thecharacteristics of technology-seeking ODI can be analyzed from the perspectives ofgeographical distribution, industry structure, entry mode etc., which provide a basisfor the research of the technology-seeking ODI in China.On this basis, the article provides a theoretical analysis on the mechanism of technology-seeking foreign investment. Based on “Bilateral duopoly ODI model” ingame theory, builds a game strategy model of non-technology enterprises to investoverseas, which demonstrates the different equilibrium outcomes resulted fromdifferent foreign investment strategies under four different conditions and exploresthe technology spillover mechanism of technology-seeking ODI and its effects. Thegame model proves the feasibility of technology-seeking ODI in developing countries.It points out that developing countries, when seeking technology, should take greatnotice of the external and internal technology spillovers and consider the size of thedomestic and international market at the same time. The motivation oftechnology-seeking becomes greater when the market is bigger and the internal andexternal technology spillovers higher. When the two-way investment reaches a NashEquilibrium, companies without technical superiority should pay special attention totheir internal technology spillover to prevent the domestic and international marketcontraction simultaneously. The paper conducts an empirical test based on theoreticalanalysis to explore the reverse technology spillover effect by estimating theinternational R&D overflow of technology-seeking ODI according to China’s ODIdata1985-2010. Considering the period when China experienced significant change,the model mainly uses state space and Kalman filtering method to analyze the drivingabilities of domestic technology advancement for China’s technology-seeking ODIand measure the dynamic effects of foreign direct investment on China’s technologyprogress. By adding the technological gap “GAP” of host state to the model, we couldaccurately measure the dynamic effects of ODI on China’s technology progress and domore detailed test on whether ODI have acquired the theoretical reverse technologyspillover and upgraded the domestic technology in key time interval (the stock offoreign direct investment get a rapid growth after2003). The results show that acertain reverse technology spillover effect appears in China’s ODI during the past twodecades, however, its driving ability is still relatively weak; and the relationshipbetween the technology gap and the reverse technology spillover effect is not stable.This paper also contributes to China’s industrial structure upgrading practice.China, with the help of the reverse technology spillover effect, invests in countriesand regions with higher technological and industrial level. Such investment isexpected to promote the adjustment and optimization of industries in China. Thepaper analyzes the mechanism of how foreign technological spillovers promote thestructure upgrading of China’s industries at three different levels, namely, the country,the industry, and the enterprise. Then, we do an empirical analysis at the industrial level to find the influence of technology-seeking ODI on the domestic industrialrestructure and development. The results show that technology-seeking ODI has nosignificant correlation with the rationalization of industrial structure, but is closelyrelated to the optimization of the industrial structure. Finally, this paper summarizesthe policy implications on the basis of the above theoretical framework and empiricalresults, and puts forward some relevant policy recommendations on how to carry outtechnology-seeking foreign investment in China.