China's Foreign Direct Investment, Reverse Technology Spillover And Productivity Improvement

Since the reforming and opening-up policy of1978, China has gained along-term of high speed growth. Economists believed that the rapid growth ofChina’seconomy relied mainly on factors such as capital and labor, and the sustainability ofthis growth pattern was questioned. As the demographic dividend disappearing, Chinaget to the Lewis turning point, and the economic growth rate began to slow down. Theendogenous growth theory suggests that productivity progress is the driven force ofsustained economic growth. As we know, technological progress mainly comes fromdomestic R&D investment and international technology spillovers. Foreign directinvestment and international trade are important ways to get international technologyspillovers. After the U.S. crisis happened2007, China’s outward foreign directinvestment increased significantly, as a developing country, to carry out ODI is anaccess to gain international technology spillovers. The technology spillover canpromote domestic technology then improve productivity, thereby serving the goal oftransformation of economic development and upgrading industrial restructuring.Based on the existing research, this paper analyzes ODI choice and spillovers ofChinese enterprises by building a Cournot model. Then, we use both time-series andpanel data to empirically explore the spillover and productivity progress effects.The first chapter is an introduction. Firstly, we discussed the background andsignificance of the research, followed by a statements on foreign direct investmentand outward foreign direct investment so as to identify the concepts referred in thispaper. Then, we give a literature review of classic foreign direct investment and thespillovers effect of ODI. Finally, we introduced the framework of this paper, andpointed out the contribution and insufficiency of this paper.The second chapter is a theoretical analysis. Firstly, we introduced iceberg costto build a basic Cournot model. According to China’s actual situation we simplifiedthe model by introduced the heterogeneity assumption to analysis the spillover effectsunder the ODI choice of China’s enterprises. The third chapter is an introduction of current situation of China’s outwardforeign direct investment, which were taken from three aspects, geographicaldistribution, industry distribution and municipality’s foreign direct investment.The fourth chapter is empirical analysis. To begin with, we analyzed time-seriesdata from1981to2012through structural vector autoregression model. Then, weused panel data of ODI from2003to2010of31provinces to explore the relationshipof spillover effects and technology progress of China. In order to control endogenousproblem, we used the instrumental variable estimation and the systematic generalizedmethod of moments to check the robust of the model.The fifth chapter is about conclusions and policy recommendations. Based ontheoretical and empirical analysis, we got the conclusions that, firstly, domesticinvestment is the Granger cause of TFP, the joint of China’s outward foreign directinvestment and domestic R&D expenditure is the Granger cause of TFP. Secondly,the impulse response function displays that ODI had positive effects on productivityprogress in the short term, while the effects is not obvious in the long term, and R&D expenditure has sustained positive impact on productivity progress. Thirdly,provincial panel data regression shows that outward foreign direct investment inChina promoted productivity progress at the1%significance level, indicating that the31provinces gained international technology spillover through outward foreign directinvestment. Impact of R&D expenditure had greater elasticity than ODI, and foreigndirect investment and international trade is also a way to get international technologyspillovers. Then, we had three proposals: To start with, encouraging enterprises to goand invest in abroad, to learn the international advanced technology to promoteproductivity and upgrading the country’s industrial structuring. What’s more, we seethe expenditure of domestic R&D is a key factor of productivity progress whichmeans we may pay more attention to independent research and innovation. Finally,foreign direct investment and international trade is still important channel forinternational technology spillovers that we should not ignore.