Gravity of intermediate inputs in productivity spillovers: Evidence from foreign direct investment in China

The literature on the effect of multinational firms on the productivity of domestic firms has received wide attention; however, the exact channel of productivity spillover at a more micro firm level is underexplored. Based on a multisector production model, we examine heterogeneous productivity spillovers through the channel of upstream foreign direct investment (FDI) inputs at the firm level. We construct a firm-level distance statistic for the upstream FDI and estimate the gravity of inputs: A firm is more productive if it gains access to more FDI inputs (general productivity-enhancing effect) and is geographically closer to upstream FDI firms (proximity effect). We find in the 2000-2007 Chinese firm data that (i) if a domestic firm's FDI input share increases by 1 percentage point, then its productivity is increased by 2.02%, and (ii) if the firm's distance from upstream FDI firms is 10% greater, then its productivity is reduced by 0.59%. The results are robust after controlling for FDI firm location selection bias and other productivity spillover channels.