FDI Liberalization as a Source of Comparative Advantage in China
AbstractThree 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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Bibliographic InfoPaper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number RP2008/91.
Length: 24 pages
Date of creation: 2008
Date of revision:
comparative advantage; FDI liberalization; labour markets; China;
Other versions of this item:
- Sebastian Claro, 2009. "FDI Liberalization as a Source of Comparative Advantage in China," Review of Development Economics, Wiley Blackwell, vol. 13(4), pages 740-753, November.
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