The Gravity of Intermediate Inputs in Productivity Spillovers : Evidence from Foreign Direct Investment in China

We distinguish the heterogeneous productivity spillovers from foreign direct investment (FDI) at the firm level. Based on a multi-sector production model, we construct a firm-level distance statistic that measures a domestic firm's access to intermediate inputs that are produced by upstream foreign-owned firms. We then estimate the gravity of intermediate inputs --- a domestic firm enjoys a higher productivity if it gains access to more inputs sold by FDI firms (general productivity-enhancing effect) and it is geographically closer to upstream FDI firms (proximity effect). Using the Chinese firm data between 2000 and 2007, we exploit the FDI-encouraging policy shock that changes upstream FDI firms' entry, exit, and market share, and thus affects the firm-level distance statistic exogenously. We find empirical supports that (i) if a domestic firm's FDI input share increases by 1 percentage point, its productivity increases by 2.15%, and (ii) if this firm's weighted average distance to upstream FDI firms is 10% greater than an otherwise identical firm, its productivity is 1.42% lower