Chinese MNEs' Outward FDI and Home Country Productivity: The Moderating Effect of Technology Gap

• Author: Marjorie Lyles,Mei Li,Shichang Liu,Dan Li
• DOI: http://doi.org/10.1002/gsj.1139
• Date: 01 November 2016
• Published date: 01 November 2016

CHINESE MNES’OUTWARD FDI AND HOME

COUNTRY PRODUCTIVITY: THE MODERATING

EFFECT OF TECHNOLOGY GAP

MEI LI,

1

*DAN LI,

2

MARJORIE LYLES,

3

and SHICHANG LIU

4

1

Economics and Management School, Wuhan University, Wuhan, China

2

Kelley School of Business, Indiana University, Bloomington, Indiana, U.S.A.

3

Kelley School of Business, Indiana University, Indianapolis, Indiana,U.S.A.

4

School of Economics andManagement, Tsinghua University, Beijing, China

Plain language summary: Today, more than ever, Chinese multinational enterprises

(MNEs) are investing abroad in search of advanced technology and managerial knowl-

edge. Our studyaims to understand whether ChineseMNEs’overseas investments benefit

their home productivity. Focusingon provinces as the unit of analysis,we capture both di-

rect and indirect effects of overseas investment on the parent company and other related

actors. We find that such benefitsoccur only when local firms havethe capability to learn

from their MNE neighbors. When the technology gap between a home province and

MNEs’hostcountries is too large, local firmsand the economy cannot capturethe benefits

of reverseknowledge spillover. The identification ofmany Chinese provinces stillnot cap-

turing the benefits offers broad implications for both local managers and policy makers.

Technical summary: This article adds to the literature investigating how emerging econ-

omy MNEs’outward foreign direct investment (OFDI) affects domestic productivity and

the moderating role of technology gap on reverse spillovers. Considering provinces as

the unit of analysis, our research captures both direct and indirect effects of Chinese

MNEs’OFDI on the parent company and other related actors and finds that the effects

of ChineseMNEs’OFDI on a province’s productivityare contingent upon thelevel of tech-

nology gap between that location and host countries. Our estimation reveals a double-

threshold model that groups Chinese provinces into three categories based on their

technology gap relative to the host countries.Most provinces are within the middle-level

and low-level categories, indicating the potential for significant effectsof Chinese MNEs’

OFDI on domestic productivities. Copyright © 2016Strategic Management Society.

INTRODUCTION

As shown in UNCTAD’s2016WorldInvestmentRe-

port, outward foreign direct investment (OFDI) by

emerging economy multinational enterprises (MNEs)

increased from $91 billion to $400 billion from 2000

to 2015, and their proportion in global FDI flows in-

creased from 7.82 percentage to 27.16 percentage.

One major motivationof OFDI by emerging economy

MNEs is to access advanced technologies overseas

(typically in developed countries) and potentially

transfer the technologies back home. Governments

of emerging economies often expect a broader spill-

over effectof OFDI activities on local firms,that is, re-

verse spillover.

As a crucial factor that affects FDI spillover, the

technology gap between source and recipient

Keywords: emerging economy; outward foreign direct

investment; reverse technology spillover; technology gap;

productivitygrowth

*Correspondence to: Mei Li, Economics and Management

School, Wuhan University, Wuhan, Hubei, 430072, China.

E-mail: limei@whu.edu.cn

Global Strategy Journal

Global StrategyJournal, 6:289–308 (2016)

Published onlinein Wiley Online Library (wileyonlinelibrary.com).DOI: 10.1002/gsj.1139

Copyright © 2016 Strategic Management Society

firms/countries has attracted much attention from

scholars. While some scholars argue that the larger

the gap the more learning and imitation opportunities

the domestic enterprises will gain (Findlay, 1978;

Keller and Yeaple, 2009; Sjöholm, 1999; Wang and

Blomstrom,1992), others posit the oppositeand argue

that spillover from FDI is a decreasing function of the

technology gap (Girma, Greenaway, and Wakelin,

2001; Kokko, 1994; Sohinger, 2005). They point

out that a large gap indicates weak absorptive

capacity to learn advanced technology (Cohen and

Levinthal, 1989).

However, in contrast to the large amount of re-

search on the effects of technology gap on inward

FDI spillover,there is little researchregarding the rela-

tionship between technology gap and outward FDI

spillover. In addition, while prior studies have found

evidence that local firms can benefit from spillovers

of OFDI, they are mainly conducted in the context of

developed countries. The impact of MNEs’OFDI on

home emerging countries is u nder-researched.

Foreign direct investment flow by firms from

China, the largest emerging economy, increased from

$2.85 billion to $127.56 billion from 2003 to 2015,

with an average annual growth rate of 37.27 percent.

There are two characteristics of Chinese MNEs’

OFDI. First, Chinese MNEs’OFDI in developed

countries has increased rapidly. In 2015, Chinese

MNEs’direct investments were $23 billion with an

annual growthof 44 percent in the EU, and $15 billion

with a yearly growth of 30 percent in the United

States. Second, the manufacturing sector has become

the most active sector for investing abroad. As the

2014 Statistical Bulletin of China’s Ou twa rd Fore ign

Direct Investment shows, there are 4,952 manufactur-

ing enterprises investing overseas, which account for

32.4 percent of thetotal OFDI. While these character-

istics reveal the interest of Chinese enterprises in ac-

quiring advanced technology from their OFDI

activities, our understanding is restricted regarding

whether OFDI delivers any benefits to domestic pro-

ductivity in emerging economies like China.

Moreover, China is a country of diversity along

multiple dimensions, including technological devel-

opment. If the technology gap is measured by labor

productivity,according to the International Statistical

Yea r bo o k,China’s average labor productivity is only

6.6 percent of that in the United States, 7.4 percent

of Germany,and 8.1 percent of Japan. While theques-

tion of whether local firms can capture the benefits of

reverse technology spillovers from Chinese MNEs’

OFDI remains, it is even more intriguing to ask

whether the effects of OFDI on productivity growth

are universal for all Chinese provinces. For countries

as geographically, technologically, and economically

diverse as China,the reverse spillover effectsof OFDI

are anything but homogeneous. Empirical evidence

shows that reverse spillovers can differ significantly

from country to country (Bertrand and Capron,

2015; Bitzer and Gorg, 2009; Braconier, Ekholm,

and Knarvik, 2001; De la Potterie and Lichtenberg,

2001) because of different income levels, trade open-

ness, technology gaps, government policies,and other

characteristics. To our knowledge, no research has

provided further insights regarding how technology

gaps may alter the relationship between emerging

economy firms’OFDI and their home country’s

productivity.

Therefore, we ask two important questions. First,

does the rapid growth of Chinese MNEs’OFDI in-

crease productivity in China? Our study is by no

means the first to examine this question. Zhao, Liu,

and Zhao (2010) analyzed the very early stage of

Chinesefirms’OFDI from 1991to 2007 and the impact

on home country productivity. However, the rapid

growth of Chinese MNEs’OFDI did not begin until

2003; accompanying the increase in investment

volume is the enhanced diversity of the industries in-

volved, investing firm ownership, and formsof invest-

ment. Meanwhile, i nvestment failure s and challenges

of learning difficulties in Chinese MNEs have been re-

ported in the media. Thus, with the rapid growth and

significant evolution of Chinese MNEs’OFDI, it is

no longer clear whether reverse spillover effects still

take place and at what level nor how Chinese MNEs’

learning takes place in host countries and whether the

learningoutcome spills over to their home neighboring

firms.

The second researchquestion asks whether thepro-

ductivity growth effect of Chinese MNEs’OFDI

varies according to the technology gap between a

Chinese province and the host country. We focus on

provinces, instead of firms, as the unit of analysis be-

cause the impact of OFDIon the home country cannot

be sufficientlycapturedat the single firm level.Reverse

spillover involves not only direct effects on the parent

firm’s productivity, but also indirect effects on other

home-related actors, such as other companies in the

same industry or upstream and downstream industries

(Elia, Mariotti, and Piscitello, 2009). The indirect

effects include imitation, competition, employment

turnover, and industry linkage, through which

emerging economy MNEs undertaking OFDI can af-

fect local firms’productivity at home. Moreover,

290 M. Li et al.

Copyright©2016 Strategic ManagementSociety Global StrategyJournal, 6:289–308 (2016)

DOI: 10.1002/gsj.1139