Outward FDI and productivity spillovers in China: an industrial perspective

Abstract

PurposePrior research demonstrated that China's Outward FDI (OFDI) is aimed at sustaining long-term economic growth by promoting industrialization and technological upgrading in the country. However, empirical evidence on the effectiveness of this strategy remains scarce. This study intends to fill this gap by exploiting endogenous changes in industrial productivity stemming from OFDI to examine if China's new strategy to spur OFDI is economically beneficial for the industries involved.Design/methodology/approachThe authors employed the two-step system-GMM and pooled mean group approaches on a panel dataset of 18 Chinese industries over the 2004–2017 period. The industrial sectors are further classified into the state dominated and non-state dominated ones to evaluate whether the productivity growth impact of OFDI varies by the level of ownership structure. Besides, the dataset is further decomposed into the ex ante and ex-post BRI era to test if this initiative has altered the underlying relationship.FindingsThe results provide robust evidence that China's OFDI through reverse spillover effects promotes productivity growth in the domestic industries, and such productivity gains are greater for the non-state dominated industries, and the OFDI in the BRI era. The findings suggest that OFDI can act as a catch-up strategy to release excess capacity and acquire technology and smart business practices.Originality/valueThis study is the first attempt to highlight the reverse productivity spillovers associated with OFDI at the industrial level. The study's findings guide the government officials and the practitioners of foreign investment to better understand the implications of their investment projects in terms of technology improvements and to optimize market opportunities.