Technology Spillover and Market Competition of Foreign Firms in China

This paper examines the impacts of foreign direct investment for the case of China. We focus on the following two main effects that have important impacts on the productivity of factors in the industries: technology spillover and market competition. Technology spillovers, both within the sectors and across sectors from foreign firms to domestic firms, help improve the domestic firms' production, while the inflow of foreign firms tend to drive domestic less productive and smaller firms out of the industries. The departure of these local firms will raise the average firm sizes, affecting the factor productivity of the sectors. Using data of 27 industries in China from 2001 and 2006, we found evidence of within-sector and across-sector technology spillovers. The results also suggest the presence of market competition effects, which for the group of Chinese industries in that period of time were negative.