FOREIGN INVESTMENT AND PRODUCTIVITY OF LOCAL CHINESE FIRMS

In this paper, we examine how foreign investment affects the productivity of local Chinese firms based on data from Chinese manufacturing firms. A series of robustness tests reveal that foreign investment significantly improves the productivity of local Chinese firms. Further analysis shows the varying impacts of foreign investment on the productivity of different types of local firms and indicates significant heterogeneity. We decompose the aggregate productivity growth into components, including the effects of technology progress, resource reallocation, firm entry and firm exit. Results show that foreign investment mainly promotes aggregate productivity growth by improving the resource allocation effect and technology progress effect.