CTTN Research Grants Program: Technology Gap and Productivity Spillovers from Chinese Outward Foreign Direct Investment

Under the CAREC Think Tanks Network (CTTN) Research Grant Program, a team of researchers – Asif Razzaq, Fareeha Adil, Hui An – analyzed if the increased international trade and investment produce technology spillovers for host economies, and whether the PRC, as an emerging economy, has enough technical capabilities to produce technology spillovers for developing or underdeveloped host countries, and what is the role of technology gap to realize these spillovers.

They find that foreign direct investment (FDI)-induced technology spillovers are not direct or linear but rather conditional on the prevailing technology gap between the PRC and FDI recipient countries. They describe different attributes of a technology gap that may exert different impacts, e.g., Observed Technology Gap (OTG) perceived as differences in learning abilities, Expected Technology Gap (ETG) understood as firm’s capability to learn from leading-edge technologies.

The team employed dynamic panel threshold regression for empirical analysis using the annual data of 46 developing Belt and Road Initiative (BRI) countries (including CAREC economies) from 2004 to 2019. The main findings include that FDI-induced technology/productivity spillovers are mainly positive when OTG (ETG) is higher (lower) than a certain threshold. These findings imply that countries/enterprises with a lower ETG are better at absorbing advanced technology from foreign firms when facing a higher OTG. Thus, a lower ETG channel optimal benefits from prevailing OTG. They conclude that most CAREC countries fall within the optimal threshold levels, endorsing positive spillovers from FDI inflows. These results are consistent across different model specifications and suggest pertinent policy recommendations.