FDI, Linkages and the Efficiency of State-Owned Enterprises in China

As China seeks to consolidate its position as an emerging global economic power, reforming the largely inefficient state-owned enterprises (SOEs) presents a major challenge. Using a comprehensive micro data set, we investigate whether SOEs in China have benefited from the managerial, technical and organisational skills possessed by multinational firms operating in the economy, and conclude that the evidence in favour of positive spillovers is not overwhelming. Limited regional linkages and low level of absorptive capacity are found to be the main reasons for this disappointing performance. Policy makers involved in the reform of SOEs should ensure that managers have the right incentives to make long-term investment in absorptive capacity development.