How does outward foreign direct investment enhance firm productivity? A heterogeneous empirical analysis from Chinese manufacturing

•This is the first paper studying the heterogeneous characters of OFDI firms and their consequences on the own-firm effect.•Based on the own-firm effect, we identify two types of heterogeneous factors involving technology and non-technology.•The absorptive capacity is firstly identified based on the product innovation and the process innovation.•The data is unique and original linked, which improves the identified rate on Chinese firms with OFDI behaviors.

Using an original linked firm-level panel data from Chinese manufacturing firms over the period 2002-2007, this paper examines how outward foreign direct investment (OFDI) led productivity increase of parent firms (known as the own-firm effect) changes over firm heterogeneity. Conducting propensity score matching (PSM) techniques and differences-in-differences (DID) analysis, we find strong and robust evidence that the first OFDI promotes parent firm's productivity and this effect varies substantially with the firms' characteristics. In particular, firm's absorptive capacity is essential for the own-firm effect, and the absorptive capacity related with the product innovation is more important than that of the process innovation for the own-firm effect. Also, OFDI strategies for obtaining advanced technology and investing in developed countries significantly strengthen the own-firm effect, whereas, government supports have no significant impacts on the own-firm effect.