TITLE:
Two-Way FDI, Absorptive Thresholds, and Total Factor Productivity Growth in Service Sector
AUTHORS:
Liyan Liu, Siyuan Liu
KEYWORDS:
Two-Way FDI, Service Sector TFP Growth, Spatial Spillover, Absorptive Capacity, Threshold Effect
JOURNAL NAME:
Modern Economy,
Vol.17 No.10,
October
28,
2026
ABSTRACT: Based on provincial panel data from 30 Chinese provinces over the period 2008-2023, this paper examines the spatial spillover effects of two-way FDI on service sector total factor productivity (TFP) growth within a spatial econometric framework, and constructs a panel threshold model to test the nonlinear constraints imposed by absorptive capacity. The findings are as follows. First, the spatial spillover effects of service sector IFDI and OFDI depend on the specification of the spatial weight matrix: the indirect effect is significantly positive under the geographic distance matrix, becomes insignificant for IFDI under the economic distance matrix, and is most pronounced under the absorptive capacity distance matrix, suggesting that spillover transmission depends on the spatial proximity of absorptive capacity rather than geographic or economic proximity. Second, the productivity spillovers of two-way FDI exhibit significant absorptive capacity thresholds, with human capital thresholds at 0.106 and 0.251, and R&D intensity thresholds at 0.012 and 0.028. Third, the absorptive threshold for producer services is lower than that for consumer services, a difference attributable to the vertical industrial linkages between producer services and manufacturing. This paper extends absorptive capacity threshold analysis to the service sector and identifies absorption mechanisms distinctive to services.