The Gravity of Intermediate Inputs in Productivity Spillovers: Evidence from Foreign Direct Investment in China

46 Pages Posted: 18 Mar 2019

See all articles by Xiao Wang

Xiao Wang

University of Science and Technology of China

Yiqing Xie

Fudan University - School of Economics

Date Written: February 26, 2019

Abstract

We distinguish the heterogeneous productivity spillovers from foreign direct investment (FDI) at the firm level. Based on a multi-sector production model, we construct a firm-level distance statistic that measures a domestic firm's access to intermediate inputs that are produced by upstream foreign-owned firms. We then estimate the gravity of intermediate inputs --- a domestic firm enjoys a higher productivity if it gains access to more inputs sold by FDI firms (general productivity-enhancing effect) and it is geographically closer to upstream FDI firms (proximity effect). Using the Chinese firm data between 2000 and 2007, we exploit the FDI-encouraging policy shock that changes upstream FDI firms' entry, exit, and market share, and thus affects the firm-level distance statistic exogenously. We find empirical supports that (i) if a domestic firm's FDI input share increases by 1 percentage point, its productivity increases by 2.15%, and (ii) if this firm's weighted average distance to upstream FDI firms is 10% greater than an otherwise identical firm, its productivity is 1.42% lower.

Keywords: FDI, forward productivity spillover, gravity effect, China

JEL Classification: F15, F21, F23, F61, F63

Suggested Citation

Wang, Xiao and Xie, Yiqing, The Gravity of Intermediate Inputs in Productivity Spillovers: Evidence from Foreign Direct Investment in China (February 26, 2019). Available at SSRN: https://ssrn.com/abstract=3341965 or http://dx.doi.org/10.2139/ssrn.3341965

Xiao Wang (Contact Author)

University of Science and Technology of China ( email )

China

HOME PAGE: http://https://sites.google.com/site/xiaowangeconomics/

Yiqing Xie

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

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