Is the relationship between inward FDI and spillover effects linear? - An empirical examination of the case of China

The relationship between foreign presence and productivity spillovers is found to be non-linear on Chinese industrial census data for 1995, supporting a curvilinear functional form. Foreign penetration rates in excess of just over a third of industrial capital are associated with declining spillover benefits, indicating the onset of negative spillovers. These findings argue for policy measures to strengthen domestically-owned Chinese industry, to provide effective competition to foreign firms and to absorb the benefits from spillovers more effectively.