Introduction

Knowledge diffusion from developed countries has long been recognized as a critical source of productivity growth of less developed countries. A potential channel of such diffusion is knowledge spillovers from foreign direct investment (FDI) to domestically owned firms (hereafter, domestic firms). A large number of empirical studies using firm-level data have examined spillovers from FDI, typically estimating the effect of the total multinational enterprise (MNE) size in a particular industry on the productivity of domestic firms in the same industry. However, in the first wave of the literature, results were mixed: While some studies found positive effects of FDI on the productivity of domestic firms (Kokko 1994; Chuang and Lin 1999; Blomström and Sjöholm1999; Sjöholm 1999; among many others), others failed to find any significant spillover effects from FDI (Haddad and Harrison 1993; Aitken and Harrison 1999).¹

Therefore, more recent studies have tried to uncover the possible channels underlying the knowledge diffusion from FDI. These channels include technical training provided by MNEs (Larrain, Lopez-Calva, and Rodriguez-Clare 2000), social interactions, including employee mobility, between MNEs and domestic firms (Fosfuri, Motta, and Ronde 2001; Hale and Long 2006), research and development (R&D) activities of MNEs in the host country (Todo 2006; Todo and Miyamoto 2006; Todo, Zhang, and Zhou 2006), and inter-industry linkages such as backward linkages (Javorcik 2004; Kugler 2006; Blalock and Gertler 2008; Javorcik and Spatareanu 2008; Liu 2008). Others find that whether or not knowledge spills over from FDI may depend on the technology gap between MNEs and domestic firms, as well as the absorptive capacity of domestic firms (Girma 2005; Girma Gong, and Görg 2005; Hale and Long, 2006; Takii 2005).

Following the literature examining more specific channels of FDI spillovers, this study, using firm-level panel data for a science park in the People's Republic of China (PRC), focuses on the role of MNE employment of educated workers in generating knowledge spillover to domestic firms. This focus is based on two important observations. First, according to the field interviews conducted by the authors of this paper in the science park, MNE engineers and managers often change jobs and work for domestic firms or start their own firms, after gaining advanced knowledge and skills from their MNE experience. These observations suggest that MNE knowledge indeed spills over to the local economy, particularly through labor mobility of educated workers. Second, a large number of PRC students educated overseas have recently returned to the PRC. According to Zweig (2008), the number of returned students drastically rose from less than 10,000 in 2000 to 25,000 in 2004. The multicultural experience and linguistic advantage of the returnees should promote interactions between MNEs and the local economy and hence facilitate knowledge spillovers from MNEs.

The science park examined in this study, the Zhongguancun Science Park (hereafter ZPark), provides an ideal context for examining MNE employment of educated workers as a source of FDI spillovers. As a cluster of high-technology industries, the Z-Park is known as the PRC's “Silicon Valley” and is characterized by the utilization of highly educated workers. Among the total of 400,000 workers in the Z-Park in 2003, 220,000, or more than 50%, had a bachelor's or higher degree, 42,000, more than 10%, had a master's or higher degree, and 3,600, about 1%, were educated abroad. The geographical concentration of firms in the park facilitates interpersonal interactions and turnover of those educated workers between MNEs and domestic firms, and thereby stimulates knowledge spillover from MNEs to domestic firms.²

To preview our results, we find that the industry aggregate of total employment at MNEs in the PRC has no significant effect on the productivity of domestic firms, concluding that MNE production activities do not unconditionally lead to knowledge spillovers to domestic firms.³ By contrast, the number of educated workers at MNEs, in particular, those with graduatelevel or overseas education, has a positive and statistically significant effect on domestic productivity. We interpret this evidence as showing that MNE employment of educated workers results in spillovers from MNEs to domestic firms.

In addition, this study examines differences in the size of spillover effects across home countries of FDI, in particular between the two largest home countries in the Z-Park, Japan and the United States (US). This examination is possible since our firm-level data set contains information on the nationality of major shareholders of each firm, which is rarely available in firm-level data sets. We find that the number of PRC workers at Japanese MNEs does not affect productivity of domestic firms in the same industry, while the number of PRC workers at US MNEs positively affects it. We further find that Japanese MNEs employ educated labor substantially less than US MNEs. Therefore, it is most likely that the absence of spillovers from Japanese MNEs is due to the small numbers of educated PRC workers employed at Japanese MNEs.

The contributions of this study are twofold. First, besides several channels of FDI spillovers found in the studies mentioned earlier, we found that MNE employment of highly educated workers is an additional channel of spillover. Second, few studies have found that the size of FDI spillovers differ substantially across the home countries of FDI. This study suggests that such differences stem from variations in firm characteristics of MNEs, such as the degree of utilization of educated labor, across home countries.

The remainder of the paper is organized as follows. Section 2 discusses the econometric procedure employed in the analysis. Section 3 presents the data set and the variables used in the regression analysis, while the results of the ordinary least squares (OLS) and generalized method of moments (GMM) estimation are discussed in Section 4. Section 5 concludes.

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