Spatial Spillovers from Foreign Direct Investment: Evidence from the Yangtze River Delta in China

This paper examines the spatial externality from foreign direct investment on domestic firms. Using Chinese firm-level data for 2004, and after accounting for an endogeneity problem, we find that foreign firms generate a significantly positive spillover effect on the regional productivity of domestic firms in similar counties and industries. Estimating a spatial-autoregressive model, we further show that such local spillovers could transmit to domestic firms in other counties and industries through interactions among domestic firms. However, these spatial multiplier effects decline with distance, thereby reducing the foreign direct investment spillover effects for domestic firms in distant locations.