Inward FDI, Spillover Effect and Financial Constraints -Theory and Evidence from China

35 Pages Posted: 18 Jun 2019

See all articles by Jim Huangnan Shen

Jim Huangnan Shen

Center for International Development, Harvard Kennedy School, Harvard University

Weiping Li

City University of Hong Kong

Jiashun Huang

Institute for New Economic Thinking (INET), at Oxford Martin School

Chien-Chiang Lee

Nanchang University

Date Written: June 7, 2019

Abstract

This paper constructs a two-stage sequential game model to investigate the spillover effect of inward FDI on the efficiency improvement of domestic firms across different ownership types in host countries. Our model shows that given the optimal spillover policy made by foreign firms, the impact of spillover effect of inward FDI is contingent upon the level of financial constraint between the domestic private and state-owned firms (SOEs). In particular, we argue that the spillover effect of FDI inward would be negatively varied with the level of financial distress level faced by both firms, but such effect differs across different ownership types of firms. We demonstrate that the negative spillover effect of inward FDI on SOEs, mainly measured by innovation, is smaller than that of domestic private firms because of the higher financing distress cost faced by the latter. Since domestic SOEs get easier access to the financing support from the state, thus allowing them to learn much more quickly from foreign firms in terms of technological advancement compared with private firms, which in turn the negative spillover effect with regard to the financial distress would be mitigated. We employ firm-level data of Chinese listed firms from 2007 to 2016 to test our hypothesis and find that our theories are broadly consistent with the empirical results.

Keywords: spillover effect; inward FDI; financial constraint; private firm; state-owned firm; Chinese manufacturing data

JEL Classification: F43, O40

Suggested Citation

Shen, Jim Huangnan and Li, Weiping and Huang, Jiashun and Lee, Chien-Chiang, Inward FDI, Spillover Effect and Financial Constraints -Theory and Evidence from China (June 7, 2019). Available at SSRN: https://ssrn.com/abstract=3400503 or http://dx.doi.org/10.2139/ssrn.3400503

Jim Huangnan Shen (Contact Author)

Center for International Development, Harvard Kennedy School, Harvard University ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Weiping Li

City University of Hong Kong ( email )

Tat Che Avenue
Hong Kong
Hong Kong

Jiashun Huang

Institute for New Economic Thinking (INET), at Oxford Martin School ( email )

Manor Road Building, Manor Road
Oxford, OX1 3U
United Kingdom

Chien-Chiang Lee

Nanchang University ( email )

999 Xuefu Avenue
Hong Gu Tan New District
Nanchang, Jiangxi 330031
China
330031 (Fax)

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