Cultural proximity and local firms' catch-up with multinational enterprises
H1: The greater the technology gap between local firms and MNEs, the higher the international trade and inward foreign direct investment, and the stronger the local firms’ own R&D efforts, the more likely the local firms is to catch up with MNEs.
H2: In the presence of cultural proximity, the speed of local firms’ catch-up with non-overseas Chinese MNEs may not be significantly higher than that with overseas Chinese MNEs.
The hypotheses are tested with a dynamic model on a large firm-level panel dataset that covers all firms in Chinese manufacturing, with annual sales of at least RMB 5 million in the year prior to the survey. The full sample is an unbalanced panel data set covering on average 200,000 firms in each year for successive 10 years (1998-2007). After using Levinsohn and Petrin (2003) method to acquire total factor productivity, a dynamic model is estimated for local firms controlling for the region-, industry- and year-effects and correcting for the correlation between error terms in the same industry-year pairs.
The results indicate that catch-up is positively related to technology gap and local firms’ technological capability measured by own R&D efforts and technology spillovers from international trade and FDI. Given the larger technology gap of local firms with non-overseas Chinese MNEs than that with overseas Chinese MNEs, local Chinese firms are expected to catch up with non-overseas Chinese MNEs at a higher rate than with overseas Chinese MNEs, as suggested by the traditional TGH. However, in the presence of cultural proximity, the speed of local Chinese firms’ catch-up with overseas Chinese MNEs is not significantly lower than that with non-overseas Chinese MNEs. This suggests that cultural proximity moderates the predication of the traditional TGH.