There has been a marked growth in recent years in outward direct investment (ODI) by developing countries, and in particular, by China. Previous studies have examined the impact on developing countries productivity of foreign direct investment (FDI) from developed countries. This paper looks at the effects of China's outward direct investment on growth in its own productivity, and at two specific reasons for this growth: technology sourcing and improvements in efficiency. These are examined using data from China's ODI in eight developed countries during the period 1991 to 2007. It appears that Chinese outward direct investment has had beneficial spill-over effects in improving total factor productivity growth over the period of the study, and that gains in efficiency have been the chief reason for this. Our vector auto regression (VAR) decomposition analysis also suggests that domestic R&D capital stocks are the most important source of productivity growth with greater contribution to technological progress. China is likely to continue to expand its ODI and it will be interesting to see whether the productivity gains continue at the same rate, and whether other developing countries also increase their ODI and reap the same benefits.
The application of new growth models and empirical techniques to expanded datasets has stimulated research on how international businesses enhance technology and knowledge diffusion between countries (Aghion & Howitt, 1992, Coe & Helpman, 1995, Coe et al., 1997, Coe et al., 2008, Grossman & Helpman, 1991, Hejazi & Safarian, 1999 and Keller, 2004). Inspired by work on trade-related technology spillovers between trading countries (Grossman & Helpman, 1991, Rivera-Batiz & Romer, 1991 and Romer, 1990), attention has also moved to technology diffusion associated with foreign direct investment (FDI) in the host economy (Blomstrom et al., 1999, Globerman, 1979, Gorg & Greenaway, 2002, Hanson, 2001, Haskel et al., 2002, Keller & Yeaple, 2003 and Lichtenberg & Van Pottelsberghe, 2001) and the extent to which foreign presence improves productivity in recipient developing countries (Aitken & Harrison, 1999, Bromstrom, 1986, Bromstrom & Kokko, 1998, Damijan et al., 2003, Haddad & Harrison, 1993, Kokko, 1994, Kokko et al., 1996 and Konings, 2001). Other recent studies have attempted to further examine the impact of FDI spillover effects on specific sources of productivity growth (Ruhul et al., 2009).
Theoretical and empirical evidence suggests that technologically disadvantaged companies can benefit from technology sourcing by investing in technologically advanced countries. According to the economic development levels and technological intensity levels of the countries where Chinese multinationals are investing, we classified two types of destinations: developed countries and newly industrialized and other developing countries. By acknowledging the heterogeneous investment motives of Chinese companies towards different destinations, we examined the contribution of outward direct investment in eight developed countries on productivity change and its components within China since the 1990s. We found that China's increased foreign presence in developed countries was subsequently associated with productivity effects at home. As shown in our empirical analysis, productivity gains induced by ODI during the period of 1991 and 2007 can be easily identified—that is, with a 1% increase in the size of China's ODI, there is a 0.55% increase in total factor productivity, 0.33% in technical efficiency change and 0.22% in technological progress.
