Firm Ownership and FDI Spillovers in China

Using firm–level data, we find that the presence of foreign firms in China is positively associated with the performance of private firms, but is negatively associated with the performance of state owned enterprises (SOEs). In particular: 1) the presence of foreign direct investment (FDI) is aggravating the differences in the wages and the quality of skilled workers between SOEs and private firms; 2) the total factor productivity (TFP) and market share tend to be lower in the presence of FDI for SOEs, but not for the private firms; 3) FDI presence is positively associated with private firms’ sales, especially their sales to foreign firms and foreign consumers, but not with the sales of SOEs. We argue that these differences are due to the fact that private firms have more flexible wage and personnel policies, which allows them to attract talents that facilitate positive FDI spillovers. In addition, we find that regulatory environment has improved for private firms in the cities and industries with high FDI presence.