Learning or competition? Knowledge spillover from domestic firms to foreign firms in a transition economy

Prior research on foreign direct investment (FDI) spillover has investigated how domestic firms may benefit from a foreign presence. However, how foreign firms can benefit from this process has rarely been examined. In this study we investigate the learning and competition effects of domestic firms on foreign firms in a transition economy, China. Specifically, we argue that the distinct ownership types of domestic firms affect their foreign counterparts’ performance differently in the Chinese context. Due to government protection and inefficiency, state-owned firms are more likely to have a negative spillover (competition) effect on foreign firm performance. In contrast, due to their experience in juggling between markets and government institutions legal-person firms are more likely to have a positive spillover (learning) effect on foreign firm performance. The above relationships are also moderated by critical firm-, industry-, and regional-level contingency factors. Empirical analyses of a large panel dataset from 2001 to 2007 in China have largely supported our predictions.