Abstract

This paper identifies the causal effect of U.S. multinationals' technology shocks on their subsidiaries' and nearby domestic firms' productivity in China. By combining firm-level data from both the U.S. and China, I match U.S. multinationals with their manufacturing subsidiaries in China and measure the multinationals' technology shocks to the local firms in China based on the multinationals' patenting activities in the U.S. To address potential endogeneity concerns, I introduce an instrumental variable strategy based on U.S. state-level R&D tax credit policies. I find multinationals' technology improvements induce an increase in the value-added output and total factor productivity (TFP) of both their own subsidiaries and domestic firms in the local areas. The magnitude of the local technology spillover effect depends on local firms' absorptive capacity. I further provide evidence of spillovers through production linkages as well as technological linkages. In addition, spillovers through technological linkages also stimulate innovation of productive local firms.