Identifying Local Spillovers of FDI : A Shift-Share Approach

The lack of evidence for the positive spillover effects of foreign direct investment (FDI) in developing countries is puzzling. In this study, we address this concern by examining the local spillovers of FDI, observing that the spillovers are often constrained at the regional level. Specifically, we construct a shift-share measure of local exposure to FDI inflows and propose a novel difference-in-differences based shift-share instrument that exploits the FDI deregulation policy upon China's accession into the World Trade Organization. Our estimation uncovers significant and positive spillover effects of FDI on local private firms' productivity, wages, and employment, which are scant in existing studies for developing countries. Additionally, we find that increasing FDI exposure promotes new entries of firms and reduces the probability of firm exit