Knowledge Spillovers and Total Factor Productivity in Manufacturing Firms: Evidence From China

Facing the dual pressures of critical technology bottlenecks and the transformation toward high-quality development, how to effectively utilize local knowledge spillovers has become a pressing issue for Chinese firms to enhance their total factor productivity (TFP). Existing studies have predominantly focused on the macro level, while the micro-level mechanisms and boundary conditions through which knowledge spillovers affect firm TFP remain unclear. To fill this gap, this study uses data from Chinese A-share listed manufacturing firms (2010–2020) to examine knowledge spillover effects on TFP and their boundary conditions. We finds that knowledge spillovers directly drive firm TFP, with technological innovation capability as the core transmission mechanism. Furthermore, we find that when a firm’s absorptive capacity exceeds 0.045, it amplifies the positive TFP effect of knowledge spillovers, whereas a capacity below this threshold inhibits it. This is because firms with insufficient absorptive capacity cannot discern and integrate knowledge, leading to resource misallocation and R&D failures. Moreover, a firm’s digital transformation mitigates the “law of distance decay” in knowledge dissemination, enhances knowledge acquisition and application, and positively moderates the productivity-enhancing effect of knowledge spillovers. This study reveals the micro-level mechanisms through which emerging market firms use knowledge spillovers to achieve “enhancements in quality and efficiency,” enriching the firm-level foundations of endogenous growth theory and providing theoretical and practical implications for firm digital strategies and government innovation policies. JEL Classification: JEL, O32, D22, L21.