Spillover Effects of Foreign Direct Investment on Export Sophistication: Evidence from Chinese Domestic Manufacturing Firms

The rapid growth of China's export sophistication and the driving factors are a matter of discussion in the literature. This study constructs a new measurement for net sophistication by utilizing the world input-output database and excluding the technologies embodied in foreign inputs. We find that although China's net sophistication has been increasing, it is much lower than that of developed countries. Based on new measurements, we explore the impact of FDI on domestic firms' net sophistication in China using data from 2000 to 2010. The results suggest that FDI has competition effects on domestic firms. Net sophistication may increase in the short term as domestic firms adjust their production by reducing the use of foreign technology to reduce costs. However, this increase in net sophistication is not sustainable without technological upgrades. Under long-term competition from foreign firms, domestic firms' net sophistication decreases. Our findings provide clear policy implications for labor-rich developing countries that seek to upgrade exports by attracting FDI.

Automated summary

This study constructs a new measurement for net sophistication and finds that China's net sophistication is lower than that of developed countries. The study suggests that FDI has competition effects on domestic firms in China, leading to short-term increase and long-term decrease in net sophistication.