Overview Overseas direct investments of the People’s Republic of China (PRC) and trade with other countries have shown exponential growth in the last 2 decades, particularly after its accession to the World Trade Organization in 2001 and the execution of the Belt and Road Initiative in 2013. The PRC ranked second in foreign direct investment (FDI) stocks, accounting for 81% of the world total (UNCTAD, 2018). The Central Asia Regional Economic Cooperation (CAREC) countries have tapped Chinese investments to help improve productivity, technical capacity, trade, and infrastructure. A review of economic literature suggests that international trade and investments produce “technology spillovers” to FDI recipients. However, two important questions come to mind: Does the PRC possess enough technical capabilities to produce technology spillovers for developing or underdeveloped FDI-recipient countries? Does the technology gap with recipient countries affect technology transfer? A CAREC Institute study analyzed data from 46 developing Belt and Road Initiative countries, which include CAREC members, from 2004 to 2019 to estimate FDI-induced technology spillovers across these countries. Findings suggest that countries or enterprises that are more capable of learning leading-edge technologies are more likely to benefit from FDIs when the observed technology gap is wider. Most of the CAREC countries covered by the study fall within optimal threshold levels and experience positive technology spillovers from Chinese FDI flows. Study Model and Findings The study argues that technology and/or productivity gain from FDI is contingent on technology gap. It extended Romer’s & L-P model in light of Findlay's (1978) hypothesis of relative backwardness, which states that a wider technology gap between advanced and developing countries provides a learning space—increasing the FDI-induced spillovers for recipient countries. The study constructed two indicators of technology gap to integrate different attributes of the phenomena: observed technology gap as prevailing differences in learning abilities, and expected technology gap as a firm’s capability to learn from leading-edge technologies. It used dynamic panel threshold regression to analyze data from the 46 FDI-recipient countries. The study generated the following results for CAREC countries. Figure 1: Chinese Outward FDI Stocks across CAREC Countries CAREC = Central Asia Regional Economic Cooperation, FDI = foreign direct investment, USD = US dollar. Source: Author. First, most CAREC members are embracing technology spillovers from FDI and showing positive growth in domestic productivity. Second, productivity or technology spillovers from Chinese FDI are positive and significant for those countries that are lagging behind the PRC in terms of observed technology gap. The threshold value suggests that countries with a wider observed technology gap (>2.68) realize positive spillovers. Third, countries must have a low expected technology gap to gain from technology and productivity spillovers, especially from advanced countries, such as the PRC. Results show that FDI-induced productivity spillovers are significantly positive in Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Pakistan, and Tajikistan. However, Mongolia and Uzbekistan, despite receiving a significant amount of Chinese FDI, failed to materialize possible or optimal benefits from spillovers due to their low capacity to absorb advanced technologies. The study shows that FDI-induced technology spillovers are not direct or linear but rather conditional on the prevailing technology gap between the PRC and FDI-recipient countries. Recipient countries with narrower expected technology gap and wider observed technology gap are more likely to benefit due to higher imitation rates and broader learning spaces. Impacts vary across the different attributes of the technology gap. For example, a wider gap in human capital or physical capital restricts the possible technology spillovers (imitation), but observed differences in labor and managerial skills help enterprises to gain from foreign firms through various channels. This study further finds that the research and development (R&D) intensity of the recipient country does not translate into significant contributions to productivity growth. While the magnitude is positive, it shows that R&D allocation in Belt and Road/CAREC countries is not enough to give a big push to productivity growth. Among CAREC countries, higher R&D intensity is observed in Georgia, Azerbaijan, and Uzbekistan, while Kazakhstan, Kyrgyz Republic, Mongolia, and Tajikistan report the lowest R&D in terms of available labor force. FDI in quality infrastructure improves productivity growth substantially, which implies the importance of government intervention in this area. Regulations and a lucrative business environment are also key contributors to domestic productivity growth. Among CAREC countries, Georgia, Mongolia, Kazakhstan, and Kyrgyz Republic posted higher scores in ease of doing business, while Pakistan, Tajikistan, and Uzbekistan are the least performing countries in this category. The productivity growth is also contingent on several socioeconomic factors and can only be achieved by stimulating all drivers. For example, a country that embraced higher FDI but has lower technical skills, weak business regulations, or poor infrastructure has failed to achieve optimal productivity growth. A country with better infrastructure and adequate human capital and regulations may fail to see optimal productivity spillovers if there are no or lower FDI inflows. Unfortunately, almost every CAREC country is lagging in one or more of these success factors. To maximize technology and productivity benefits from FDI, countries should devise policies to further minimize the expected technology gap by strengthening the innovation process, encouraging talent, increasing R&D allocations, and integrating effectively with ongoing regional financial projects aimed at optimizing technology spillovers. Resources A. Razzaq, F Adil and Hui An. 2021. Technology Gap and Productivity Spillovers from Chinese Outward Foreign Direct Investment. Xinjiang. CAREC Institute. Ask the Experts Asif Razzaq Senior Research Specialist, CAREC Institute Asif Razzaq holds a PhD in Economic System Analysis and Management Science from Dalian University of Technology. His core areas of interest include: digitalization, foreign direct investment, climate technology, and environmental/resources sustainability. His papers have been published in various journals. An Hui Professor, School of Management and Economics, Dalian University of Technology Dr. An Hui has published books and papers focused on financial crisis theory and financial risk management. She is currently researching the impacts of Chinese overseas investment across the CAREC/Belt and Road region. She also serves as a member of the 13th National People's Congress of Liaoning Province and the 11th Central Committee of the Democratic Construction Association. Fareeha Armughan Research Fellow & Lead at Center of Evidence Action Research, Sustainable Development Policy Institute Dr. Fareeha Armughan’s core areas of research are financial inclusion, evidence, education, social protection and gender. She is a trainer of BCURE (Building Capacity Using Research Evidence), a program of Evidence for Policy Design of the John F. Kennedy School of Public Policy. She is also a consultant for the World Bank’s Crisis Resilient Social Protection Program. Central Asia Regional Economic Cooperation Institute (CAREC) The Central Asia Regional Economic Cooperation Institute (CAREC) is an intergovernmental organization promoting economic cooperation in Central Asia and along the ancient Silk Road through knowledge generation and sharing. CAREC is jointly shared, owned, and governed by 11 member countries: Afghanistan, Azerbaijan, People’s Republic of China, Georgia, Kazakhstan, Kyrgyz Republic, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan. Leave your question or comment in the section below: View the discussion thread.