Does technology gap increase FDI spillovers on productivity growth? Evidence from Chinese outward FDI in Belt and Road host countries

Abstract The Belt and Road Initiative (BRI) is driving the rapid growth of China's outward foreign direct investment (OFDI) across the BRI region. Many BRI host countries, which are developing or underdeveloped in nature, are embracing higher Chinese OFDI in the hope of improving their productivity, trade, and infrastructure. Unlike traditional models, which assumes that foreign investment stimulates productivity growth by generating technological diffusion from the developed world to the developing economies, it is argued that whether China, as a developing country, has sufficient technological capabilities to generate technological spillovers for developing BRI host countries, and what is the role of technology gap to catch up these spillovers. In doing so, this study examines the impact of Chinese OFDI-induced technology spillovers on total factor productivity growth conditional on technology gap between China and BRI host countries. This study employs System Generalized Method of Moments and Feasible Generalized Least Squares estimators and provides two key findings. First, Chinese OFDI increases the productivity growth of BRI host countries; however, the productivity spillovers are lower in magnitude across all specifications. Second, the productivity spillovers from Chinese OFDI decrease with the increase in technology gap, and after a certain threshold, these spillovers become less pronounced.