The impact of foreign ownership, local ownership and industry characteristics on spillover benefits from foreign direct investment in China

The past two decades have witnessed a striking transformation in the Chinese economy: from a centrally planned to an essentially market-oriented system, and away from an inward-orientated industrialisation strategy to ‘open-door’ policies aimed at integration with the global economy. Accompanying the progressive marketisation and inter-nationalisation of the economy in this period, has been an unprecedented expansion in inward foreign direct investment (FDI) into China by multinational enterprises (MNEs). Indeed, in 2003 China overtook the USA and became the largest recipient of FDI (United Nations Conference on Trade and Development (UNCTAD), 2004). This growth in inward FDI is widely believed to be a key component of China’s economic miracle. However, simply measuring the direct effects of inward FDI on Chinese industrial productivity will underestimate the overall contribution of foreign investment if spillover effects are significant (Buckwalter, 1995; Murphy, 1992; O’Malley, 1994). Therefore this study examines the spillover effects that arise from FDI in Chinese manufacturing.