An Empirical Study On Market Size, Marketization And Technology Spillovers Of Foreign Direct Investment

The reason behind the introduction of Foreign Direct Investment (FDI) by many developing countries including China during their early stages of economic boosting is mainly to cope with the problem induced by lacking of domestic capital and foreign exchange. After a period of high-speed growth in which China accumulates too much foreign exchange and household savings, its motivation for introducing more FDI gradually becomes to acquire those advanced technologies that could benefit its own growth. With the rising of China’s Aggregate economic volume and the deepening of its economic reform, marketization and growth of the market size in various districts of China makes great improvements. Many studies focus on whether the effect of FDI spillovers exists and the possible determinants of that effect, and I consider following this study route. This paper combines theoretical analysis and empirical test on the subjects including the existence of the effect of FDI spillover and its determinants, and also provides possible solution suggestion on how to have those domestic firms stand against competition in local market, benefit from FDI spillover, and avoid possible negative impact from FDI.This paper uses the panel data sample in 1990-2013 from 9 provinces (municipalities and autonomous regions) of China’s middle region to test if technology spillovers of FDI have impacts on manufacturing industry of those provinces and trys to locate the factors that influence the spillovers of FDI. The study indicates that spillovers of FDI only became significant until corresponding region had reached certain development threshold. The level of marketization instead of market size has significant positive effects on the technology spillovers of FDI. The provinces with higher level of marketization gain more technological progress from the inflow of FDI. Further study finds that reducing government intervention and the development of private economy can be helpful for the local firms to benefit from the technology spillovers of FDI, but product market, factor market, market intermediaries and legal environment still have no significant effect on FDI spillovers. The corresponding policy recommendations are provided based on conclusions.