Intra- and Inter-industry Externalities: An Empirical Study on FDI in the Manufacturing Industry in Guangdong Province

Guangdong Province has attracted much FDI since adopting the economic reform and open-door policy, and become one of the provinces that attracted most foreign investment. The paper make an empirical study in depth on the intra- and inter-industry spillover effect that FDI create on Guangdong domestic firms, the spillover effect of the technology gap between FDI and Guangdong firms and the level of agglomeration of industries, in the context of estimating FDI externalities among detailed manufacturing industries for 21 cities in Guangdong in 2004 by using unpublished data from Guangdong economic census in 2005. The findings are threefold. First, the presence of FDI creates negative externalities within industries and positive externalities between industries through backward linkages. Second, FDI-externalities are stimulated by large technological differences between FDI and Guangdong firms and by geographic concentration of industries. Third, we identify a substantial level of regional heterogeneity of the externality impact of FDI, in line with the notion that FDI may have contributed to processes of changing regional prosperity under economic reform and open-door policy.