Document Type
Article
Language
eng
Publication Date
9-2016
Publisher
Springer
Source Publication
Atlantic Economic Journal
Source ISSN
1573-9678
Abstract
It has been recognized that multinational corporations can spill over to non-affiliated firms in host economies. Existing studies of foreign direct investment (FDI) and productivity growth often assume firms are perfectly efficient. Our paper relaxes this assumption and explores how FDI affects a firm’s technical efficiency improvement as well as its technical progress in a stochastic frontier model. The stochastic frontier model estimates a firm’s production frontier given a set of production inputs. The deviation of a firm’s actual output level from its maximum level of output is defined as technical inefficiency. Using data from more than 12,000 Chinese manufacturing firms, we find that FDI in a firm's own industry (horizontal FDI) does not necessarily improve the firm’s technical efficiency. However, firms with a larger absorptive capacity tend to benefit more from horizontal FDI than others. We also find that foreign presence in a firm’s downstream industries helps improve the firm’s technical efficiency, while foreign presence in upstream industries does not. In addition, a generalized Malmquist index decomposition shows that foreign affiliates achieve a higher productivity growth than domestic firms mainly through a faster improvement in technical efficiency rather than through technical progress.
Recommended Citation
Wang, Miao Grace and Wong, Sunny, "Effects of Foreign Direct Investment on Firm-level Technical Efficiency: Stochastic Frontier Model Evidence from Chinese Manufacturing Firms" (2016). Economics Faculty Research and Publications. 545.
https://epublications.marquette.edu/econ_fac/545
Comments
Accepted version. Atlantic Economic Journal, Vol. 44, No. 3 (September 2016): 335-361. DOI. © 2016 International Atlantic Economic Society. Used with permission.
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