Foreign direct investment vs. portfolio investment: evidence from China

Does foreign direct investment lead to higher performance? We address this long-standing question by using a novel research design. Using detailed panel data from China, we compare firms with foreign direct investment to firms with foreign portfolio investment within the narrow band around a threshold level of foreign direct investment designation. We find empirical evidence that firms with foreign direct investment outperform firms with portfolio investment. This is accomplished via more efficient production, more investment in research and development, more investment in physical capital, and more focus on the host market. We do not, however, find evidence that foreign direct investment firms introduce more new products or benefit from higher labour productivity.