Testing backward linkages of FDI in China

  • Zhuomin LIU

Student thesis: MPhil Thesis (Lingnan)


Inward FDI (Foreign Direct Investment) affects productivity of local industries through three channels- direct effects, horizontal spillovers, and vertical linkages. This study focuses on the backward linkages of FDI in the 28 two-digit manufacturing sectors in China, as well as their horizontal and forward linkage effects. Two related tests, firm level pooled data test 1999-2002 and industrial level panel data test 1994-2003 are conducted to investigate whether backward linkages from multinational buyers brings productivity gain to local suppliers. Firm level tests provide convincing evidence that increase backward linkage of FDI will lead to productivity gains. This includes not only total factor productivity, but also labor productivity. Industry level tests, when conducted with and without time dummy variables, give different results: estimations with time dummy variables give little or sometimes negative results on the coefficients of backward linkage, while those without time dummy variables give positive and significant findings. Our estimation results also suggest positive effects of horizontal spillovers for both tests. Forward linkage is found to be negative in general. In sum, among the three spillover channels, backward linkage and horizontal spillovers are found to be beneficial to local industries, which is consistent with previous studies and the Chinese government’s incentives to attract more foreign direct investment.
Date of Award2005
Original languageEnglish
Awarding Institution
  • Department of Economics
SupervisorPing LIN (Supervisor) & Kui Yin CHEUNG (Supervisor)

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