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Why India is mainly engaged in offshore service activities, while China is disproportionately engaged in manufacturing?

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  • LO, Chu-Ping
  • LIU, Bih Jane
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    Abstract

    We extend the model of Antràs and Helpman (Antràs, P., Helpman, E., 2004. Global Sourcing. Journal of Political Economy 112(3), 552-580) by incorporating the merits of Zhang and Markusen (Zhang, K.H., Markusen, J.R., 1999. Vertical Multinationals and Host-country Characteristics. Journal of Development Economics 59(2), 233-252.) to demonstrate why China has been so successful in disproportionately attracting foreign offshore manufacturing activities, while India has been engaged mainly in offshore service activities. We argue that the host country's industry-specific technology capabilities make the difference in FDI composition between China and India. In addition to incomplete contract frictions, the host country's technological capabilities, which affect technology transfer costs, are essential to FDI inflows. We also find that, after excluding overseas Chinese investment, India is almost on par with China in terms of the market size it offers to marketing-seeking FDI.

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    Bibliographic Info

    Article provided by Elsevier in its journal China Economic Review.

    Volume (Year): 20 (2009)
    Issue (Month): 2 (June)
    Pages: 236-245

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    Handle: RePEc:eee:chieco:v:20:y:2009:i:2:p:236-245

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    Web page: http://www.elsevier.com/locate/chieco

    Related research

    Keywords: Foreign direct investment Outsourcing Offshore Technology transfer;

    References

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    1. Wilfred J. Ethier & James R. Markusen, 1991. "Multinational Firms, Technology Diffusion and Trade," NBER Working Papers 3825, National Bureau of Economic Research, Inc.
    2. Pol Antras, 2004. "Incomplete Contracts and the Product Cycle," 2004 Meeting Papers 19, Society for Economic Dynamics.
    3. Wei, Wenhui, 2005. "China and India: Any difference in their FDI performances?," Journal of Asian Economics, Elsevier, vol. 16(4), pages 719-736, August.
    4. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
    5. Kevin H. Zhang & James R. Markusen, 1997. "Vertical Multinationals and Host-Country Characteristics," NBER Working Papers 6203, National Bureau of Economic Research, Inc.
    6. repec:hrv:faseco:4784029 is not listed on IDEAS
    7. Pol Antràs & Elhanan Helpman, 2003. "Global Sourcing," NBER Working Papers 10082, National Bureau of Economic Research, Inc.
    8. Kokko, Ari & Blomstrom, Magnus, 1995. "Policies to encourage inflows of technology through foreign multinationals," World Development, Elsevier, vol. 23(3), pages 459-468, March.
    9. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    10. Zhang , Kevin Honglin, 2000. "Human Capital, Country Size, and North-South Manufacturing Multinational Enterprises," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 53(2), pages 237-260.
    11. Bruce Kogut & Udo Zander, 1993. "Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation," Journal of International Business Studies, Palgrave Macmillan, vol. 24(4), pages 625-645, December.
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    Cited by:
    1. Asuyama, Yoko, 2012. "Skill Distribution and Comparative Advantage: A Comparison of China and India," World Development, Elsevier, vol. 40(5), pages 956-969.

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