Technology spillovers from Chinese outward direct investment: The case of Ethiopia

•Investigates technology spillovers from China's outward direct investment in the Ethiopian manufacturing sector•We use instrumental variables to attenuate endogeneity concerns between FDI presence and domestic firm productivity.•We find that Chinese firms exhibit significantly higher levels of productivity than domestic firms.•Chinese firms' presence has different spillover on domestic firms.

The present study uses firm survey data of 1033 manufacturing firms operating in Ethiopia in 2011 to examine the impact of Chinese outbound direct investment on the productivity of domestic firms. Particularly, we attempt to answer two questions. Firstly, are Chinese-owned (henceforth foreign) firms more productive than local ones? Secondly, does the presence of foreign firms generate technology spillovers on domestic firms operating in the same industry? Our empirical results show that foreign firms are more productive and that their presence has different spillover effects on the productivity of domestic firms. In particular, we find that domestic firms with higher absorptive capacity experience positive spillovers, while those with low absorptive capacity witness negative spillover. We also find that small firms and non-exporting firms benefit more from spillovers than do other types of domestic firms. In this study, instrumental variables are used to address the potential endogeneity between foreign firm presence and domestic firm productivity.