Empirical Study On FDI Spillover Effect Of Business Groups In China

The technology spillover effect of Foreign Direct Investment (FDI) within businessgroups is a way of technology resources transfer. Integrating resource-based theory andtransaction cost theory, this paper argues that the performance of subsidiaries isdetermined by resources which the subsidiaries obtained. Subsidiaries could obtainresources from the open market channel as well as business groups channel, which isdetermined by transaction costs of each channel. Domestic subsidiary area marketmaturity degree influences the transaction costs of open markets channel, and domesticsubsidiary technology resources abundance and FDI cultural differences affecttransaction costs of group channel. Based on the Annual Industrial Survey Database(2000-2006) of the Chinese National Bureau of Statistics (NBS), this paper examinesthe impacts of FDI of a subsidiary in a business group upon the performance of otherdomestic subsidiaries.The results show that: After controlling the impacts of firm size and other factors,the FDI ratio in a business group has positive impact upon the economic performance ofits domestic subsidiaries, and this spillover effect is moderated by the factors ofinstitutional environment as well as the structural factors of the group itself. Thematurity degree of the product market of the region where the domestic subsidiary haslocated in would positively moderate the above spillover effect, while that of the factormarket has a negative moderating role. The abundance of technological resources indomestic subsidiary would enhance the spillover effect of group FDI. Furthermore, theFDI with small cultural distance to China (i.e., FDI from Hong Kong, Macao andTaiwan) has stronger spillover effect on economic performance than that with largecultural distance (i.e., FDI from other foreign countries).The mechanism of FDI ratio in a business group spillover on the domesticsubsidiary innovation performance is complex. It will take more time to spill overpositive effects on the subsidiary innovation performance. This spillover effect oninnovation is partly moderated by the factors of institutional environment as well as thestructural factors of the group itself. The maturity degree of the product market of the region where the domestic subsidiary has located in would positively moderate theabove spillover effect, while that of the factor market has no effect. The abundance oftechnological resources in domestic subsidiary would decrease the spillover effect ofgroup FDI. Furthermore, the FDI with small cultural distance to China has strongerspillover effect on innovation than that with large cultural distance.Business groups could be an effective vehicle for FDI technology spillover.Although Chinese business groups were reconfigured by the government, they have thesame synergies with Western business groups. The institutional environment affects FDItechnology spillovers within business groups. The above conclusions can help us tobetter understand the roles of business groups in transitional economy, and the necessityto integrate the views of institutional theory and transaction cost theory in studying thespillover effect of FDI.