How does the productivity of foreign direct investment spill over to local firms in Chinese manufacturing?

Productivity spillovers are arguably one of the most important benefits of FDI. Productivity spillovers are economic externalities that the presence of FDI brings to the host country’s domestic firms. These spillovers can take place through four broad channels, namely, inter-firm mobility of workers and managers, industry input-output linkages, exports by multinational affiliates, and horizontal effects. There has been a rich emerging literature, both theoretical and empirical, on these FDI productivity spillover channels since the 1990s. The empirical results show that the effectiveness of the different spillover channels also depends on various properties of the potential local recipients, such as their export propensity, research and development expenditure, geographic proximity to foreign firms, and employee training. The sources of FDI are also found to have an impact on spillover effects. This literature indicates that FDI productivity spillovers are complex phenomena, whose investigation requires detailed firm-level data.