Technology Gap, Reverse Technology Spillover and Domestic Innovation Performance in Outward Foreign Direct Investment: Evidence from China

• Author: Yanrui Wu,Dora Marinova,Ruicheng Wang,Chongyang Zhou,Jin Hong
• Date: 01 March 2019
• DOI: http://doi.org/10.1111/cwe.12272
• Published date: 01 March 2019

China & World Economy / 1–23, Vol. 27, No. 2, 2019

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©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

*Jin Hong, Associate Professor, University of Science and Technology of China, China. Email: hongjin@

ustc.edu.cn; Chongyang Zhou, PhD Candidate, University of Science and Technology of China, China.

Email: zhoucy@mail.ustc.edu.cn; Yanrui Wu, Professor, University of Western Australia, Australia. Email:

yanrui.wu@uwa.edu.au; Ruicheng Wang, PhD Candidate, Nanjing University of Science and Technology,

China. Email: w_wangruicheng@163.com; Dora Marinova, Professor, Curtin University, Australia. Email:

D.Marinova@curtin.edu.au. This work was supported by the National Natural Science Foundation of China

(Nos. 71172213 and 71572188).

Technology Gap, Reverse Technology Spillover

and Domestic Innovation Performance in Outward

Foreign Direct Investment: Evidence from China

Jin Hong, Chongyang Zhou, Yanrui Wu, Ruicheng Wang, Dora Marinova*

Abstract

This research adds to the literature studying the effects of outward foreign direct

investment (OFDI) on domestic innovation performance and the moderating effect

of a technology gap between host and home countries. New definitions of observed

technology gap and expected technology gap are proposed. An observed technology gap

captures the existing differences in technology level between establishments, regions

or countries. An expected technology gap is an indication of the effort of imitating and

learning from technology leaders. The corresponding measures and effects of observed

and expected technology gaps on OFDI-induced reverse technology spillover are

analyzed. OFDI in developed countries promotes innovation performance. However,

OFDI in emerging markets hampers innovation performance. It is also found that

regions with a wider observed technology gap and a narrower expected technology gap

can benet more from OFDI.

Key words: innovation performance, outward foreign direct investment, reverse technology

spillover, technology gap

JEL codes: O21, O30, O32, O33

I. Introduction

The United Nations Conference on Trade and Development (UNCTAD) 2017 World

Investment Report witnessed a surge of outward foreign direct investment (OFDI)

by emerging market multinational corporations (EMMNCs). From 2000 to 2016, the

amount of OFDI made by EMMNCs surged from US$91bn to US$383bn with their

Jin Hong et al. / 1–23, Vol. 27, No. 2, 2019

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©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

proportion of global foreign direct investment (FDI) ows increasing from 7.82 percent

to 28 percent. In 2016, Chinese OFDI rose by 44 percent to reach US$183bn, making

China the second largest outward foreign direct investor for the rst time.

The rise of OFDI in emerging economies has given scholars the opportunity to

justify the effects of reverse spillover. Different from “strategic asset seeking” OFDI

theory (Hill et al., 1990), Fosfuri et al. (2001) put forward the theory of emerging

economy business without advantages: their OFDI was not to utilize their advantages,

but to approach new technologies and knowledge. Many scholars since have contended

that OFDI made by emerging economies represents knowledge-seeking behavior, aimed

at learning cutting edge technology from advanced economies to promote domestic

productivity and innovation performance.

Scholars concluded that FDI-induced technology spillover is contingent on a

technology gap between the host and home countries (Findlay, 1978; Wang and

Blomström, 1992; Sjöholm, 1999; Keller and Yeaple, 2009). However, a consistent

conclusion about the relationship between technology gap and technology spillover has

not been made. One stream of literature considers a technology gap as the observed

and existing differences among establishments, regions or countries (Findlay, 1978;

Blomström and Sjöholm, 1999; Keller and Yeaple, 2009), while another considers a

technology gap to be a reection of the effort of establishments or regions learning from

technology leaders and exploiting technology spillover (Glass and Saggi, 1998; Pittiglio

et al., 2016). Thus, building a rigorous theoretical framework to differentiate these two

terms and to investigate the moderating effects of a technology gap on the technology

spillover process is worthwhile.

In contrast to the large amount of research on the effects of a technology gap on

inward FDI spillover (Blomström and Sjöholm, 1999; Sjöholm, 1999), little research

has been conducted regarding the relationship between a technology gap and reverse

technology spillover through OFDI. In this paper, clear and explicit definitions of

observed and expected technology gaps are proposed. The different effects of host

countries are also distinguished, after a division of OFDI in developed countries and

emerging markets. As a result, and based on Chinese provincial level data, this paper

is one of the few to clearly examine the moderating impact of a technology gap on the

effects of OFDI on domestic innovation performance in the context of emerging markets.

The rest of the paper proceeds as follows. In Section II, we review the relevant

literature. In Section III, we describe the dataset and main variables. In Section IV,

regression results are reported. We conduct several robustness checks in Section V.

Finally, we summarize the findings of the research, outline theoretical and practical

implications and highlight the limitations.