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FDI Liberalization as a Source of Comparative Advantage in China

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  • Claro, Sebastian

Abstract

Three features of China?s trade patterns suggest that elements beyond factor abundance explain its export performance. The high penetration in world markets of labour-intensive products has been accompanied by: (i) a high share in exports of productivity-advanced foreign-owned enterprises (FIEs), (ii) a high penetration of FIEs in labour-intensive sectors, and (iii) a relative high sophistication of China?s exports. We show that FDI liberalization endogenously introduces Ricardian features to an otherwise standard endowment-based trade model, strengthening China?s natural comparative advantage in labour-intensive products. We discuss how capital accumulation, productivity growth, rural-urban migration, incentives for foreign investment and distortions in financial markets affect this bias. We conclude that policies enhancing domestic firms? production, through productivity growth or capital market distortions, implicitly support the capital-intensive sector. In contrast, policies that encourage FDI, like greater access to China?s capital and labour market would shift China?s comparative advantage even further towards labour-intensive products.

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File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2008/rp2008-91.pdf
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Bibliographic Info

Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number RP2008/91.

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Length: 24 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:unu:wpaper:rp2008-91

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Keywords: comparative advantage; FDI liberalization; labour markets; China;

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References

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  1. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
  2. Haishun Sun & Ashok Parikh, 2001. "Exports, Inward Foreign Direct Investment (FDI) and Regional Economic Growth in China," Regional Studies, Taylor & Francis Journals, vol. 35(3), pages 187-196.
  3. Robert E. Lipsey, 2002. "Home and Host Country Effects of FDI," NBER Working Papers 9293, National Bureau of Economic Research, Inc.
  4. Françoise Lemoine, 2000. "FDI and the Opening Up of China's Economy," Working Papers 2000-11, CEPII research center.
  5. Alessandro Nicita & Marcelo Olarreaga, 2007. "Trade, Production, and Protection Database, 1976--2004," World Bank Economic Review, World Bank Group, vol. 21(1), pages 165-171.
  6. 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.
  7. Findlay, Ronald, 1978. "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, MIT Press, vol. 92(1), pages 1-16, February.
  8. John Romalis, 2007. "Capital Taxes, Trade Costs, and the Irish Miracle," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 459-469, 04-05.
  9. Irving B. Kravis & Robert E. Lipsey, 1993. "The Effect of Multinational Firms' Operations on Their Domestic Employment," NBER Working Papers 2760, National Bureau of Economic Research, Inc.
  10. Liu, Xiaming & Wang, Chengang & Wei, Yingqi, 2001. "Causal links between foreign direct investment and trade in China," China Economic Review, Elsevier, vol. 12(2-3), pages 190-202.
  11. Sebastián Claro, 2006. "Why does China protect its labour-intensive industries more? -super-," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(2), pages 289-319, 04.
  12. Robert E. Lipsey & Irving B. Kravis & Romualdo A. Roldan, 1983. "Do Multinational Firms Adapt Factor Proportions To Relative Factor Prices?," NBER Working Papers 0293, National Bureau of Economic Research, Inc.
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Cited by:
  1. Mitchell H. Kellman & Yochanan Shachmurove, 2010. "Adam Smith Meets an Index of Specialization in International Trade," PIER Working Paper Archive 10-029, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Roberto Álvarez & Sebastián Claro, 2007. "On the Sources of China’s Export Growth," Working Papers Central Bank of Chile 426, Central Bank of Chile.
  3. Mitchell H. Kellman & Yochanan Shachmurove, 2011. "Herfindahl-Hirschman Meets International Trade and Development Theories," Working Papers 50, Department of Applied Econometrics, Warsaw School of Economics.

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