Vertical Spillover Effects of Multinationals on Chinese Domestic Firms Via Supplier–Customer Relationships

Abstract

Foreign direct investment (FDI) can benefit domestic firms in the host country. Using firm‐level data for China, we find statistically positive vertical spillover effects of multinational enterprises on the performance of domestic firms through backward and forward supplier–customer relationships. The spillover effects are mainly from large multinational enterprises and are greater for state‐owned firms and in poor regions. Our results are robust for both parametric regression and nonparametric matching techniques. Our findings have strong policy implications: while regulations relating to building business relationships with domestic firms when seeking foreign direct investment should be established, such policies should be aimed at private firms, big multinationals and less developed regions.

Keywords: foreign direct investment, multinational enterprises, supplier–customer relationships, vertical spillover effects

JEL Classification: F21, L14, O53