FDI Spillovers in History: Interwar Japanese “Zaikabo” investment in China’s cotton spinning industry

We estimate productivity spillovers from Japanese cotton-spinning firms in China (known as Zaikabo) to local Chinese cotton-spinning mills based on plant-level data for 1925 to 1938. In order to capture the important role of distance in facilitating such spillovers we geo-localised the plants. Our results provide clear evidence for positive spillovers from Zaikabo to local Chinese mills, which go hand-in-hand with an upgrade in production technology towards greater use of capital. Spillovers are very localised, being strongest within a radius of up to 10 km around the Zaikabo and particularly strong for mills in Shanghai. Exploiting information on the workforce composition of the Japanese affiliates, we find suggestive evidence of a skilled-labour channel: spillovers tend to be larger from Zaikabo employing higher shares of skilled labour. We also find some evidence in line with the idea that these gains are larger for Chinese mills with higher initial productivity, consistent with a role for absorptive capacity. Our paper is the first to document FDI productivity spillovers in a historical context and to characterise the channels through which they operate.

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