Many studies of FDI productivity spillovers show that the existence of the spillovers depends on whether companies of host country can absorb the spillovers or not. Using a panel dataset of four-digit industries in the Chinese manufacturing sector for the period of 1998-2003, this paper finds that productivity spillovers mainly come from foreign investment in other industries in the same region, and intra-industrial spillovers are relatively small. This implies that specialized knowledge is more difficult to spill than general knowledge. In general, technological gaps, absorbing abilities, the degree of cooperation between domestic and foreign capital, and proper competition are important conditions for spillovers to exist.