Institutional Environment, OFDI, and TFP Growth: Evidence from China

Using Chinese Industrial Enterprise Database and Foreign Investment Enterprises database (2003–2007), this article studies the impact of institutional environment and outward foreign direct investment (OFDI) on total factor productivity (TFP) at firm and provincial level. The results show that good institutional environment is conducive to firm and provincial level TFP growth, OFDI also proves to be positive. Considering spatial correlation, provinces with strong TFP have negative impact on adjacent provinces. For different ownership enterprises in home country, favorable institutional environment promotes the TFP growth of private enterprises, while OFDI has a significant positive effect on the TFP growth of both private and foreign-invested enterprises, the TFP of private enterprises show obvious polarization effect.