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Foreign Direct Investment and Total Factor Productivity in China: A Spatial Dynamic Panel Analysis


  • Eunsuk Hong,

    1. Management School, Queen's University Belfast, M112, 25 University Square, Belfast BT7 1NN, Northern Ireland, UK (e-mail:
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  • Laixiang Sun

    1. Department of Financial & Management Studies (DeFiMS), SOAS, University of London Thornhaugh Street, Russell Square, London WC1H 0XG, UK. (e-mail:
    2. Institute of Geographic Sciences & Natural Resources, Chinese Academy of Sciences, Beijing, China
    3. International Institute for Applied Systems Analysis, Laxenburg, Austria
    4. Guanghua School of Management, Peking University, Beijing, China
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  • We gratefully acknowledge the support of the Sixth Framework Programme of the European Commission (contract number: 044255, the CATSEI project). We thank Tao Li, Pilsoo Kim, Xiaming Liu, Damian Tobin, Jihai Yu, Yundan Gong, Laura Hering and the seminar and workshop participants at SOAS of the University of London, the China Growth Centre of Oxford University and Management School of Queen's University Belfast. We are especially grateful to the Guest Editors and two anonymous referees for detailed and very constructive comments and suggestions.


This study develops a spatial dynamic model to assess the total-factor-productivity (TFP) effects of externalities generated by foreign direct investment (FDI). The model is capable of disentangling TFP effects from capital accumulation effects and introducing spatial interdependence based on theoretical derivation rather than spatial statistical tests. An application of this model to a panel dataset of China at the provincial level over 1980–2005 shows significantly positive impact of FDI externalities on TFP within and across regions. This finding is robust to a range of empirical specifications of our theoretical model, to different estimators, and to alternative proxies of FDI intensity variable.