Foreign Direct Investment and Total Factor Productivity in China: A Spatial Dynamic Panel Analysis

Abstract

This study develops a spatial dynamic model to assess the total-factor-productivity (TFP) effects of externalities generated by foreign direct investment (FDI). The model is capable of disentangling TFP effects from capital accumulation effects and introducing spatial interdependence based on theoretical derivation rather than spatial statistical tests. An application of this model to a panel dataset of China at the provincial level over 1980-2005 shows significantly positive impact of FDI externalities on TFP within and across regions. This finding is robust to a range of empirical specifications of our theoretical model, to different estimators, and to alternative proxies of FDI intensity variable. © Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2011.