FDI Spillovers and Industrial Policy: The Role of Tariffs and Tax Holidays

This paper examines how industrial policy – specifically tariff liberalization and tax subsidies – affects the magnitude and direction of FDI spillovers. We examine these spillover effects across the diverse ownership structure of China’s manufacturing sector for 1998 through 2007. We find that tariff reforms, particularly tariff reductions associated with China’s WTO ascension, increased the productivity impacts of FDI’s backward spillovers. Tax policy – both corporate income and VAT subsidies – has seemingly drawn FDI into strategic industries that spawn significant vertical spillovers. We conclude that liberalization measures during the critical 1998–2007 period on balance served to enhance productivity growth in Chinese industry.