Crowding out or spillover: the impact of foreign direct investment on the capacity utilization of domestic firms

Overcapacity in China underscores the impact of external factors under open economic conditions. We utilize the relaxation of a foreign investment regulatory policy as an exogenous policy shock, incorporating a difference-in-differences (DID) approach with the instrumental variable method to assess the impact of foreign direct investment (FDI) on the capacity utilization of domestic firms. We find that FDI significantly reduces the capacity utilization of domestic firms overall through a mix of positive spillover and negative crowding-out effects, especially in the central and western regions, low-tech industries, domestic sales, and private firms.