The Knowledge Spillover Effect of Foreign Firms on Chinese Local Firms

The most important way of transferring knowledge from foreign firms to local firms in host countries is knowledge spillover effect. Knowledge spillover is conducted through three mechanisms: customer-supplier linkage effect, employee flowage effect, and demonstration and competition effect . In the coastal provinces of China where foreign firms account for more than 1/10 of total firms, demonstration and competition effect within the industries and customer-supplier effect between foreign firms and its local suppliers are most significant mechanisms of knowledge spillover from foreign firms. Nationally the most significant way of knowledge spillover is through employee flowage effect.