Local Institutions, Foreign Direct Investment and Productivity of Domestic Firms

Abstract

Abstract This paper examines the linkage between foreign direct investment ( FDI ) and the productivity of domestic firms, paying particular attention to local institutions. Using Chinese manufactures from 1998 to 2007, we find strong evidence that FDI negatively affects the productivity of domestic firms. Firm in regions with better institutions suffers more from foreign presence owing to production contraction, labor cost increases and innovation deterrence.