Prepared for the Conference on China’s Economic Geography and Regional Development

Foreign direct investment (FDI) 1 is believed to bring positive spillovers to domestic firms in the host country. Empirical studies, however, have found conflicting evidence on the effects of FDI. In this study, we use a firm-level industrial census to estimate the relationship between the intensity of foreign presence and performance of domestic firms in China. More specifically, we attempt to answer the following questions. First, are Chinese domestic enterprises affected by the presence of foreign invested firms operating in the same industry which they do business in? Second, are Chinese domestic enterprises affected by the presence of foreign invested firms operating within related industries at the same locality where they conducted their businesses? It is a fact that a substantial portion of FDI in China are originated from neighboring economies, especially from the three most Chinese populated economies Hong Kong, Macao and Taiwan, that are technologically much less advanced than industrial countries. Finally, we examine whether foreign investment firms from these economies affect the Chinese domestic firms differently compared to those from other investing countries. The estimation results offer some support for the existence of positive spillovers. There seems to be stronger evidence that domestic industries benefit from foreign presence in the related industries within the province. Employment shares of foreig