TECHNOLOGY GAP AND PRODUCTIVITY SPILLPOVERS FROM CHINESE OUTWARD FOREIGN DIRECT INVESTMENT

TECHNOLOGY GAP AND PRODUCTIVITY SPILLPOVERS FROM CHINESE OUTWARD FOREIGN DIRECT INVESTMENT

Donor: CAREC Think Tanks Network Research Grants Program

CAREC (Central Asia Regional Economic Cooperation) INSTITUTE, Urumqi, China

Duration period: From April 01, 2021 to Dec 10, 2021

Introduction: Chinese outward foreign direct investment (FDI) and trade have shown exponential growth in the last two decades, particularly after the accession of the World Trade Organization (WTO) in 2001 and the execution of the Belt and Road Initiative (BRI) in 2013. Extant literature argued that international trade and investment produce technology spillovers for host economies. And many BRI host economies, including Central Asia Regional Economic Cooperation (CAREC) countries, are operating under low end economic models and placing foreign investment in the hope of improving their productivity, technical capacity, trade, and infrastructure. However, a few important questions remain unanswered; whether China, as an emerging economy, has enough technical capabilities to produce technology spillovers for developing or underdeveloped host countries, and what is the role of the technology gap to realize these spillovers?

Objectives: Under the CAREC Think Tanks Network (CTTN) Research Grant Program, a team of researchers – from SDPI and Dalian University of Technology, China– analyzed if the increased international trade and investment produce technology spillovers for host economies, and whether the PRC, as an emerging economy, has enough technical capabilities to produce technology spillovers for developing or underdeveloped host countries, and what is the role of technology gap to realize these spillovers.

Activities/Findings: They find that foreign direct investment (FDI)-induced technology spillovers are not direct or linear but rather conditional on the prevailing technology gap between the PRC and FDI recipient countries. They describe different attributes of a technology gap that may exert different impacts, e.g., Observed Technology Gap (OTG) perceived as differences in learning abilities, Expected Technology Gap (ETG) understood as firm’s capability to learn from leading-edge technologies.

Outcomes: The team employed dynamic panel threshold regression for empirical analysis using the annual data of 46 developing Belt and Road Initiative (BRI) countries (including CAREC economies) from 2004 to 2019. The main findings include that FDI-induced technology/productivity spillovers are mainly positive when OTG (ETG) is higher (lower) than a certain threshold. These findings imply that countries/enterprises with a lower ETG are better at absorbing advanced technology from foreign firms when facing a higher OTG. Thus, a lower ETG channel optimal benefits from prevailing OTG. They conclude that most CAREC countries fall within the optimal threshold levels, endorsing positive spillovers from FDI inflows. These results are consistent across different model specifications and suggest pertinent policy recommendations.

Impact/ policy level intervention: the study is published from the platform of CAREC Institute, China and policy recommendations are endorsed for further policy making.