FDI, indirect horizontal spillover and firm productivity in China’s manufacturing industry

ABSTRACT The indirect spillover effects of manufacturing foreign direct investment (FDI) through upstream suppliers are often ignored by academia. This paper first explains theoretically the mechanism of indirect horizontal spillovers from foreign-funded firms and matches China Industry Business Performance Data and the China Customs Dataset, then empirically analyzes the indirect horizontal spillover effects of China’s manufacturing FDI through upstream suppliers. The results show that China’s manufacturing FDI generates significant positive technology spillovers to local firms through an indirect horizontal mechanism; the vertical spillover effects of China’s manufacturing FDI are asymmetric; the indirect spillover effects are influenced by firm ownership, whether it trades or not, and firm size; and the indirect spillovers generated by FDI restrain the quality of products for exports by local firms in the intra-industry but significantly improve the quality of products for export of upstream suppliers through backward linkages.