1Foreign Direct Investment and Manufacturing Productivity in China

Abstract: This paper provides empirical evidence on the link between foreign direct investment and manufacturing productivity growth in China’s provinces. Using a sample of 23 manufacturing sectors regrouped into three big industries in 29 Chinese provinces during 1988-94, it provides estimates of total factor productivity (TFP) growth by manufacturing sector and relates them to FDI inflows. The results show significant differences in TFP growth between manufacturing sectors dominated by foreign direct investment and those dominated by domestic investment in the consumer goods industry, confirming the usual literature findings on the positive impact of FDI on economic growth, while such clear-cut conclusion can not be made for the sectors in the intermediate and equipment industries. Explanations are proposed for these findings. On the other hand, comparisons of TFP dispersion among Chinese provinces show that the inflows of FDI might have induced greater regional disparities for more open sectors in all the three big industries, coinciding with the usual findings on the driving role of FDI in regional growth divergence