Does foreign direct investment really enhance China's regional productivity?

While foreign direct investment (FDI) is widely recognized as one of major driving forces on promoting the regional economic growth in China, its impact on regional productivity is unclear and less systematically investigated. This article investigates the effect of FDI on regional productivity in China. Specifically, we adopt a newly developed measure of total factor productivity (TFP) to deal with the endogenous inputs choice accompanied with various measures of FDI, enabling to provide robust estimates on the TFP effect of FDI. Moreover, we examine the role of absorptive ability on the FDI-TFP nexus and explore the existence of FDI spillover effect on productivity across regions. The potential difference in productivity effect of FDI between coastal and non-coastal regions is also examined. Based on the province-level panel dataset over the period 1997–2006, the various estimates show that the overall productivity effect of FDI is significantly positive, while this effect depends heavily on the host region's absorptive ability. Technological gap is found to associate with a significantly negative coefficient along with the finding that FDI tends to exhibit a higher impact on productivity in coastal regions than their non-coastal counterparts, highlighting a widening income inequality between coastal and non-coastal regions in China.