A recent study by Professor Ma Xufei of CUHK Business School and collaborators has shed light on the complex relationship between foreign direct investment (FDI) and the growth of Chinese startups. Analyzing data from 2013 to 2023, the research indicates that FDI’s impact is not linear but follows an inverted U-shaped curve.
Initially, foreign investment brings significant benefits to local businesses through knowledge transfer, technological diffusion, and managerial expertise. This positive spillover effect is most pronounced when foreign firms constitute approximately 48% of sales within a specific industry and province. During this phase, local entrepreneurs can leverage the insights and innovations of foreign companies adapting to the Chinese market.
However, the study warns that exceeding this 48% threshold can turn FDI into a disadvantage. As foreign firms gain a larger market share, they can lead to intensified competition, monopolization of resources, and an increased cost of talent, making it harder for local startups to thrive. The presence of a robust non-state economy can amplify these effects, fostering both cooperation and more aggressive expansion by foreign entities.
To navigate this dynamic, the research suggests that local entrepreneurs should focus on applying acquired know-how to related industries or different geographical regions rather than engaging in direct competition. Policymakers are advised to implement targeted investment strategies, promote balanced competition, and continuously monitor FDI levels to prevent negative consequences and ensure that learning opportunities outweigh competitive pressures. These findings offer valuable insights for emerging markets beyond China.
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