A Comparison Of Absorptive Abilitv Of The Chinese State Sector And Private Sector

FDI has played an important role in China’s economic development during the thirty years. Yet recently China gradually cancels incentives used to attract FDI. Does that imply that the presence of FDI can no longer benefit the development of the Chinese economy? Therefore, a study on the relationship between the presence of FDI and the productivity of the domestically-owned enterprises, using the recent data, is of specially importance to evaluate China’s FDI policy. Also, regarding how to take advantage of the presence of FDI to improve the productivity of domestically-owned enterprises, absorptive ability theory argues that the investment in R&D and better human capital can help domestically-owned enterprises to benefit more from productivity spillovers from FDI. In China, enterprises fall into three major categories according to their ownership, namely the sector, the private sector, and the foreign sector. Statistics shows that the state sector invests more in R&D and has better human capital than the private sector. Does that mean the state sector can benefit more from the presence of FDI? Using data analysis and an econometric method, this thesis finds that the positive relationship between the presence of FDI and the productivity of domestically-owned enterprises, comprising of the state sector and the private sector, is still robust. Moreover, the state sector benefits more from the presence of FDI that the private sector does. These findings have important policy implications.