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Modes of foreign direct investment and patterns of trade: Why do multinational enterprises come To China?

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  • Park, Innwon
  • Park, Soonchan

Abstract

This paper investigates the link between patterns of trade and modes of foreign direct investment (FDI) by utilizing exports, imports, and inward FDI data for China over the period 1998 to 2007. We construct a modified gravity equation to find the main modes of inward FDI into China with considering spatially interdependent third country effect. The problem of endogeneity is controlled by applying the system generalized method of moments (GMM) estimation technique. We find that there is no evidence of statistically significant substitutability and complementarity between bilateral trade and FDI in the aggregate data. On the contrary, the trade-diverting third country effect of inward FDI is proven to be strong. As we decompose the aggregate trade goods into final and intermediate goods, we find that there is strong evidence of vertical FDI for importing intermediate goods from the home country and exporting final goods back to the home country. However, the motivation of vertical FDI has been diminishing and the modes of export-platform and complex vertical FDI have begun to emerge. This implies that China has imported intermediate inputs from the home country of FDI, produced final goods or parts and components, and exported them back to the home country. Recently, however, we have noticed that there has been a diversion trend of the vertical linkage from home country to third countries. This indicates that the main mode of inward FDI into China has been shifting from “home export base” to “third country export base”.

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File URL: http://mpra.ub.uni-muenchen.de/26679/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26679.

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Date of creation: 08 Nov 2010
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Handle: RePEc:pra:mprapa:26679

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Keywords: patterns of trade; foreign direct investment; multinational enterprises; China;

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References

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  1. Nicole Madariaga & Sandra Poncet, 2006. "FDI in Chinese Cities: Spillovers and Impact on Growth," Working Papers 2006-22, CEPII research center.
  2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  3. Kukenova, Madina & Monteiro, Jose-Antonio, 2008. "Spatial Dynamic Panel Model and System GMM: A Monte Carlo Investigation," MPRA Paper 13405, University Library of Munich, Germany, revised Feb 2009.
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  8. Yeaple, Stephen Ross, 2003. "The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment," Journal of International Economics, Elsevier, vol. 60(2), pages 293-314, August.
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  12. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, vol. 140(1), pages 260-281, September.
  13. Zhang, Kevin Honglin & Song, Shunfeng, 2001. "Promoting exports: the role of inward FDI in China," China Economic Review, Elsevier, vol. 11(4), pages 385-396.
  14. Blonigen, Bruce A. & Davies, Ronald B. & Waddell, Glen R. & Naughton, Helen T., 2007. "FDI in space: Spatial autoregressive relationships in foreign direct investment," European Economic Review, Elsevier, vol. 51(5), pages 1303-1325, July.
  15. Geishecker, Ingo & Nielsen, Jørgen Ulff-Møller & Pawlik, Konrad, 2008. "How Important is Export-Platform FDI? : Evidence from Multinational Activities in Poland," Working Papers 08-28, University of Aarhus, Aarhus School of Business, Department of Economics.
  16. Kevin Honglin Zhang, 2001. "What Attracts Foreign Multinational Corporations To China?," Contemporary Economic Policy, Western Economic Association International, vol. 19(3), pages 336-346, 07.
  17. Martial Foucault & Thierry Madies & Sonia Paty, 2008. "Public spending interactions and local politics. Empirical evidence from French municipalities," Public Choice, Springer, vol. 137(1), pages 57-80, October.
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