Technological Upgrading in Chinese Cities: The Role of FDI and Industrial Structure

Abstract

Foreign direct investment (FDI) has long been regarded as a key source of new knowledge external to the domestic economy, but relatively little is known about how the host regions’ technological upgrading is affected by industrial structure in terms of considering cognitive proximity. This article explores how industrial structure, whether related or unrelated, influences technological upgrading within and across cities. Based on a panel dataset on 239 Chinese cities in 2001–2009, our empirical results show that FDI spillover has a positive effect on local technological upgrading in both nearby and neighboring cities. Therefore, in Chinese cities, related industrial variety significantly enhances FDI spillover, while unrelated industrial variety diminishes FDI spillover. Only related industrial variety has a spatial effect, and it facilitates technology transfers and disseminations of FDI across cities. Our empirical evidence has implications at both the theoretical level and for policy making.