FDI Spillovers Over Time in an Emerging Market: The Roles of Entry Tenure and Barriers to Imitation

Abstract

In this study, we examine how foreign direct investment (FDI) spillovers to domestic firms in an emerging market occur over time. From the organizational learning perspective, we propose that, as entry tenure of foreign firms in an industry increases, domestic firms can learn from the foreign firms over time and improve their productivity. We further build upon the competitor imitation argument to propose that this effect will be stronger when barriers to imitation faced by the domestic firms are lower. Based upon a comprehensive panel dataset on manufacturing firms in China in 1998-2007, our findings strongly support these arguments. We find that entry tenure of foreign firms in an industry has a positive relationship with the productivity of individual domestic firms in the same industry, albeit at a diminishing rate. We also find that this positive relationship is stronger when the foreign firms have lower export intensity, lower intangible asset intensity, and have followed a more rhythmic (i.e., less irregular) entry pattern-situations characterizing lower barriers to imitation.

Knowledge Spillovers from FDI: A Critical Review from the International Business Perspective

“…; Zhang et al . ). The speed at which subsidiary technology spreads locally is a neglected – yet crucial – issue in discussion of the strategic consequences of KSs.…”

“…Zhang et al . () analyse a set of subsidiary characteristics to infer the height of barriers to imitation local firms have to overcome, and find that they affect the FDI‐KSE. However, local firms constitute not only a threat for subsidiaries, but also an opportunity in terms knowledge sourcing (Cantwell ).…”

Reverse Productivity Spillovers in the OECD: The Contrasting Roles of R&D and Capital

“…It is also possible that local capital investment can have a negative competitive and market stealing effects, i. e., it can reduce foreign firms' productivity. In the short run, there are strong barriers to imitation in FDI spillovers through intangible capital (Zhang, Li, and Li 2014), and foreign entrants will find it difficult to observe, copy or access the largely firm-specific capital and home-market knowledge of their local competitors. The result of locals' increased capital investments (with high private returns and low social returns) may be lower productivity of foreign affiliates due to lower demand drawn away by local firms.…”

Foreign competition, domestic competition and innovation in Chinese private high-tech new ventures

“…We consider the Chinese high-tech sector as the most appropriate setting for our research, as past studies have emphasized the threat and/or importance of foreign entrants on the innovativeness of domestic Chinese high-tech firms, given the costly and risky nature of the innovation process in these high-tech firms (Pisano, 1990;Wei &Liu, 2006;Zhang et al, 2014). We use the OECD classification of the high-tech sector adopted by China, which defines high-tech industries as industries with a higher OECD-average direct, indirect and overall R&D intensity (i.e.…”

“…However, empirical evidence on the spillover effect of FDI is mixed. Some studies have found a positive FDI spillover effect on domestic firms (Tian, 2007;Wei &Liu, 2006;Zhang et al, 2014), whereas others have shown no evidence, or even a negative association between the presence of foreign firms and local firms' productivity (Aitken & Harrison, 1999;Feinberg & Majumdar, 2001;Haddad & Harrison, 1993).…”