Favorable Policy, Heterogeneous FDI Entry And Technology Spillovers

Internationally technology spillover is considered as one of the main sources of technology progress in less developed countries (LDCs)(Grossman and Helpman,1991), and some empirical evidences confirm that there exists obvious technology spillover through FDI entry’s channel. However, such evidences are mainly from developed countries while LDCs deny that. Comparing the two different results of FDI spillover in developed countries and LDCs, we could find that along with differences in host countries’absorptive capacity like technology distance and human capital, there are differences in FDI itself. In another word, FDI enjoys more favorable policy and export-platform FDI is the main form. For example, there are two obvious styled facts in the FDI history in China. First, FDI enjoys various favorable policies, which resulted in super-national treatment; Second, FDI is connected with progress trade model, which resulted in export-platform FDI. According to he New New-Trade Theory, the favorable policies would lower FDI entrance threshold, moreover, it would change the ratio of market oriented FDI, which owns higher technology, and export platform FDI, which could conduct business with considerable lower technology. Therefore, together with progress trade and export oriented development model, governments’favorable polices to attract more FDI could not be neglected in the analysis of FDI spillover in China.The existing papers on FDI spillover follow the homogeneity and exogenous treatment tradition, which focus on the host countries absorptive capacity and ignore the favorable policies’influence on FDI entrance and spillover in host countries. Based on the styled fact that a considerable number of export platform FDI exist in China, This paper introduces the new-New trade theory to FDI spillover study.Following HMY model and Yeaple Model, chapter three extends the self-selection study from horizontal FDI to vertical FDI, which is one form of export platform FDI. Specifically, it builds a model of market self-selection between export, export platform FDI and market oriented FDI, which verifies firstly in theory that the host country’s favorable policy like tax-reduction makes the FDI’s TFP decline and the spillover effects worsen although more FDI would be attracted.Such hypotheses are confirmed by the empirical evidence in the following chapters with Chinese manufacturing firms’data. Chapter four finds that export platform FDI’s TFP is lower than market oriented FDI’s duo to the export tax rebate and other transport cost reductions, which leads to less spillover effect of the former. The idea is confirmed by the empirical evidence in chapter six:the spillover effect of export platform FDI is systematically different from that of market oriented FDI and export platform FDI hinders more China enterprises to improve TFP. The conclusion is robust with different industry categories and not affected by whether FDI is from OECD countries or not.Further studies in chapter five and seven find that China’s current tax favorable policy induces more less productive FDI and hence deteriorates the FDI’s impeditive spillover effects, especially the export platform FDI’s. Our finding can explain why China attracted so many FDI but induced little technology spillover to national enterprises. The conclusion is robust with different industry categories and not affected by whether the capital is from HMT or not.