Dynamics Of Outward Foreign Direct Investment, Technology Transfer And Economic Growth: Evidence From China

The emergence of emerging markets' multinationals firms has awakened the concerns of research community about their consequences on production activities in the home economy.These concerns become more serious when the home economy is still in the middle of development process and facing several developmental constraints.Drawing on endogenous growth perspective,this study investigates whether Outward Foreign Direct Investment(OFDI)from the largest emerging market economy,the Peoples' Republic of China,affects home country's output growth by facilitating reverse-technology spillovers.Despite the importance and relevance of the topic,very little attention is paid to the contribution OFDI makes in further advancing the economic development of the emerging economies.The present study fills this gap by providing some theoretical and empirical evidence on the relationship by using datasets on aggregate level,the host location of investment abroad and the industrial level data,and thus yields significance policy implications.At first,the study investigates the most common perception that OFDI crowds out domestic investment and hence decelerates capital formation and economic growth in the home country.For empirical analysis,autoregressive distributed lagged bound testing along with dynamic fully modified least square technique is utilized to get robust results.In addition.Granger causality analysis based on vector error correction mechanism is also conducted to determine the direction of relationship among the variables.The findings reveal that OFDI from China complements domestic investment,and therefore is a source of capital formation.This result supports the view that Multinational Enterprises(MNEs)from China enter into foreign markets to seek cheaper input factors and moderm technology,and as a result,the whole domestic economy benefits directly through the transfer of assets back to the home country or indirectly through backward and forward production linkages of domestic enterprises with MNEs.Secondly,the impact of OFDI on economic growth is analyzed from both the theoretical and empirical aspects.It is observed that OFDI is a source of reverse-technology transfer which helps stimulate the industries and in the long-run,generates productivity growth in the economy.In addition,it is also observed that the dynamics of OFDI and economic growth folloxw an asyrmmetric trajectory.This implies that both an increase and reduction in OFDI have significantly positive effects on economic growth in China.Specifically,this finding supports the theoretical intuitions that an increase in OFDI has the potential to promote knowledge accumulation and spurring economic growth.The positive economic growth effects from a downward movement in OFDI occur because a reduction in overseas investment relaxes the pressure on domestic credit constraints in the home country,implying an expansion in domestic investment that ultimately fosters economic growth.The similar findings are observed from the Chinese foreign investment going to the developed countries where both an increase and decrease in investment is found to have a positive effect on economic growth in China.However,in the context of developing countries,a neutral effect is observed when there is an increase in OFDI.Moreover,the results obtained from GMM estimation using industrial level data show a positive economic growth effects,confirming the previous findings from aggregate economy level analysis.Finally,a simultaneous framework is utilized to more carefully examine the theoretical insights that OFDI raises economic growth through transferring advanced technology from the host to home country.For this,an econometric model is specified that consists of a series of three main equations describing the behavior of the endogenous variables.The findings suggest that OFDI helps improve technology innovation,and in turn technology innovation stimulates economic growth in China.Moreover,the results also reveal that there is an endogenous relationship between these three variables in such a way that a threshold level of technology innovation is needed to enhance economic growth,and economic growth is also necessary to boost technology innovation and overseas investment.All in all,the findings provide strong evidence to believe that OFDI spurs economic growth in China by generating reverse-technology spillovers and enhancing capital accumulation.Besides,strategies to develop human capital and domestic innovation activities also deserve much attention to make a win-win strategy to gain from the dynamics of cross-border investment.