Modes of foreign direct investment and patterns of trade: Why do multinational enterprises come To China?
AbstractThis 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”.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 26679.
Date of creation: 08 Nov 2010
Date of revision:
patterns of trade; foreign direct investment; multinational enterprises; China;
Find related papers by JEL classification:
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-20 (All new papers)
- NEP-INT-2010-11-20 (International Trade)
- NEP-TRA-2010-11-20 (Transition Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James E. Anderson & Eric van Wincoop, 2001.
"Gravity with Gravitas: A Solution to the Border Puzzle,"
NBER Working Papers
8079, National Bureau of Economic Research, Inc.
- James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
- James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
- Richard Blundell & Steve Bond, 1995.
"Initial conditions and moment restrictions in dynamic panel data models,"
IFS Working Papers
W95/17, Institute for Fiscal Studies.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
- R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
- Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
- Hayakawa, Kazunobu & Matsuura, Toshiyuki, 2011.
"Complex vertical FDI and firm heterogeneity: Evidence from East Asia,"
Journal of the Japanese and International Economies,
Elsevier, vol. 25(3), pages 273-289, September.
- Hayakawa, Kazunobu & Matsuura, Toshiyuki, 2009. "Complex Vertical FDI and Firm Heterogeneity: Evidence from East Asia," IDE Discussion Papers 211, Institute of Developing Economies, Japan External Trade Organization(JETRO).
- Kazunobu Hayakawa & Toshiyuki Matsuura, 2010. "Complex Vertical FDI and Firm Heterogeneity: Evidence from East Asia," Keio/Kyoto Joint Global COE Discussion Paper Series 2010-008, Keio/Kyoto Joint Global COE Program.
- Bruce A. Blonigen, 2005.
"A Review of the Empirical Literature on FDI Determinants,"
NBER Working Papers
11299, National Bureau of Economic Research, Inc.
- Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
- 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.
- Hausman, Jerry A, 1978.
"Specification Tests in Econometrics,"
Econometric Society, vol. 46(6), pages 1251-71, November.
- José-Antonio Monteiro & Madina Kukenova, 2009.
"Spatial Dynamic Panel Model and System GMM: A Monte Carlo Investigation,"
IRENE Working Papers
09-01, IRENE Institute of Economic Research.
- 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.
- Kukenova, Madina & Monteiro, Jose-Antonio, 2008. "Spatial Dynamic Panel Model and System GMM: A Monte Carlo Investigation," MPRA Paper 11569, University Library of Munich, Germany, revised Nov 2008.
- John Whalley & Xian Xin, 2006.
"China's FDI and Non-FDI Economies and the Sustainability of Future High Chinese Growth,"
NBER Working Papers
12249, National Bureau of Economic Research, Inc.
- WHALLEY, John & XIN, Xian, 2010. "China's FDI and non-FDI economies and the sustainability of future high Chinese growth," China Economic Review, Elsevier, vol. 21(1), pages 123-135, March.
- 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.
- Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2005.
"Estimating Models of Complex FDI: Are There Third-Country Effects?,"
Center for Policy Research Working Papers
73, Center for Policy Research, Maxwell School, Syracuse University.
- 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.
- Bruce A. Blonigen & Ronald B. Davies & Glen R. Waddell & Helen T. Naughton, 2004.
"FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment,"
NBER Working Papers
10939, National Bureau of Economic Research, Inc.
- 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.
- M Arellano & O Bover, 1990.
"Another Look at the Instrumental Variable Estimation of Error-Components Models,"
CEP Discussion Papers
dp0007, Centre for Economic Performance, LSE.
- 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.
- 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.
- Nicole Madariaga & Sandra Poncet, 2006.
"FDI in Chinese Cities: Spillovers and Impact on Growth,"
2006-22, CEPII research center.
- Nicole Madariaga & Sandra Poncet, 2007. "FDI in Chinese Cities: Spillovers and Impact on Growth," The World Economy, Wiley Blackwell, vol. 30(5), pages 837-862, 05.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.