A Systems Perspective on the Embeddedness of Foreign-Invested Enterprises and Functional Upgrading in Manufacturing: The Threshold Effect of Industry Chain Centrality

This study adopts a systems perspective to explain why the embeddedness of foreign-invested enterprises (FIEs) generates divergent effects across countries—promoting upgrading in some while inducing low-end lock-in in others. Based on complex network theory, we construct an industry chain centrality indicator and examine how the embeddedness of FIEs affects functional upgrading in manufacturing, as well as the threshold effect created by industry centrality. Using panel data on manufacturing sectors of 42 economies from 2003 to 2020, we employ a panel threshold model to analyse the nonlinear impact of FIEs embeddedness. The results show a significant single threshold. When industry centrality is low, the positive effect of FIE embeddedness on functional upgrading is not significant; once the threshold is crossed, the effect strengthens markedly. This pattern indicates that industries occupying hub positions in global production networks can better absorb and amplify knowledge and technology spillovers generated by FIEs, promoting upgrading of high value-added functions such as R&D, management, and marketing. Robustness checks confirm these findings, and heterogeneity analysis shows that different types of functional upgrading exhibit distinct threshold levels. Overall, the study highlights that the impact of FIEs depends critically on an industry’s structural position within the global network.