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FDI Spillovers and Industrial Policy: The Role of Tariffs and Tax Holidays

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  • Luosha Du
  • Ann Harrison
  • Gary Jefferson

Abstract

This paper examines how industrial policy – specifically tariff liberalization and tax subsidies – affects the magnitude and direction of FDI spillovers. We examine these spillover effects across the diverse ownership structure of China’s manufacturing sector. Using this approach, we control for policies that are likely to be correlated with both firm-level productivity and industry FDI, thereby limiting the problem of omitted variables and bias associated with estimating the impacts of FDI spillovers. During 1998-2007, the span of our Chinese firm-level data set, both tariffs and FDI tax holidays changed dramatically. Our results highlight the efficacy of vertical FDI spillovers. We find that tariff reforms, particularly tariff reductions associated with China’s WTO ascension, increased the productivity impacts of FDI’s backward spillovers. Tax policy – both corporate income and VAT subsidies – has seemingly drawn FDI into strategic industries that spawn significant vertical spillovers. We conclude that liberalization measures during the critical 1998-2007 period on balance served to enhance productivity growth in Chinese industry.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16767.

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Date of creation: Feb 2011
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Handle: RePEc:nbr:nberwo:16767

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References

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  1. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 605-618, June.
  2. Harrison, Ann & Rodríguez-Clare, Andrés, 2010. "Trade, Foreign Investment, and Industrial Policy for Developing Countries," Handbook of Development Economics, Elsevier, Elsevier.
  3. Albert G. Z. Hu & Gary H. Jefferson, 2002. "FDI Impact and Spillover: Evidence from China's Electronic and Textile Industries," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 25(8), pages 1063-1076, 08.
  4. Brian Aitken & Ann Harrison & Robert E. Lipsey, 1995. "Wages and Foreign Ownership: A Comparative Study of Mexico, Venezuela and the United States," NBER Working Papers 5102, National Bureau of Economic Research, Inc.
  5. Brecher, Richard A. & Diaz Alejandro, Carlos F., 1977. "Tariffs, foreign capital and immiserizing growth," Journal of International Economics, Elsevier, Elsevier, vol. 7(4), pages 317-322, November.
  6. Haddad, Mona & Harrison, Ann, 1993. "Are there positive spillovers from direct foreign investment? : Evidence from panel data for Morocco," Journal of Development Economics, Elsevier, Elsevier, vol. 42(1), pages 51-74, October.
  7. Lin,Justin Yifu, 2009. "Economic Development and Transition," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521735513.
  8. Lin, Justin Yifu & Monga, Celestin, 2011. "Growth identification and facilitation : the role of the state in the dynamics of structural change," Policy Research Working Paper Series 5313, The World Bank.
  9. Steven Globerman, 1979. "Foreign Direct Investment and `Spillover' Efficiency Benefits in Canadian Manufacturing Industries," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 12(1), pages 42-56, February.
  10. Lin, Ping & Liu, Zhuomin & Zhang, Yifan, 2009. "Do Chinese domestic firms benefit from FDI inflow?: Evidence of horizontal and vertical spillovers," China Economic Review, Elsevier, Elsevier, vol. 20(4), pages 677-691, December.
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  1. Facciamo i conti
    by Alberto Bagnai in Goofynomics on 2014-02-25 00:03:00
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Cited by:
  1. Lipsey, Robert E. & Sjöholm, Fredrik, 2011. "South–South FDI and Development in East Asia," Asian Development Review, Asian Development Bank, Asian Development Bank, vol. 28(2), pages 11-31.
  2. Winkler, Deborah, 2013. "Potential and actual FDI spillovers in global value chains : the role of foreign investor characteristics, absorptive capacity and transmission channels," Policy Research Working Paper Series 6424, The World Bank.
  3. Selin Özyurt & Timo Mitze, 2012. "The Spatial Dimension of Trade- and FDI-driven Productivity Growth in Chinese Provinces – A Global Cointegration Approach," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0308, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  4. Farole, Thomas & Winkler, Deborah, 2012. "Foreign firm characteristics, absorptive capacity and the institutional framework : the role of mediating factors for FDI spillovers in low- and middle-income countries," Policy Research Working Paper Series 6265, The World Bank.
  5. Mitsuo Inada, 2013. "The Effects of Foreign Direct Investment on Industrial Growth: Evidence from a Regulation Change in China," KIER Working Papers, Kyoto University, Institute of Economic Research 856, Kyoto University, Institute of Economic Research.
  6. Xu, Xinpeng & Sheng, Yu, 2012. "Productivity Spillovers from Foreign Direct Investment: Firm-Level Evidence from China," World Development, Elsevier, Elsevier, vol. 40(1), pages 62-74.
  7. Jeon, Yongbok & Park, Byung Il & Ghauri, Pervez N., 2013. "Foreign direct investment spillover effects in China: Are they different across industries with different technological levels?," China Economic Review, Elsevier, Elsevier, vol. 26(C), pages 105-117.
  8. Harrison, Ann & Sepulveda, Claudia, 2011. "Learning from developing country experience : growth and economic thought before and after the 2008-09 crisis," Policy Research Working Paper Series 5752, The World Bank.

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