FDI and Industrial Productivity in China: Evidence from Panel Data in 2001–06

How does foreign direct investment (FDI) affect China's industrial productivity? While the topic is important, the relevant empirical studies in the literature have been limited. This paper attempts to close the gap by investigating the issue with panel data in the period 2001–06. Empirical models for both productivity level and growth are developed, in which two channels are identified through which FDI may affect industrial productivity directly and indirectly. The estimates suggest that FDI has positive direct and spillovers effect on China's industrial productivity level and growth, and the contribution of FDI to productivity is enhanced by its interaction with China's human capital. While labor-intensive industries benefit more from FDI direct effects, capital-intensive industries gain more from FDI spillover effects.