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FDI In, SOE Out: Understanding the reallocation effects of FDI liberalization in China

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  • Tang, Wei
  • Wang, Yuan
  • Wei, Haiqi

Abstract

This paper investigates the impact of FDI liberalization on allocative efficiency in host countries. Using China’s 2002 FDI deregulation as a policy experiment, we show that growth impacts of FDI in a policy-distorted economy is primarily driven by between-firm resource reallocation rather than within-firm productivity improvements. Domestic firms with higher pre-reform marginal revenue products of capital (MRPK) receive greater capital inflows and exhibit subsequent declines in MRPK. We emphasize the role of FDI reform in reducing ownership-related distortions: it accelerated the exit of state capital. These results highlight that the pro-competitive effects of openness policies can act as external catalysts to mitigate domestic policy-induced distortions.

Suggested Citation

  • Tang, Wei & Wang, Yuan & Wei, Haiqi, 2026. "FDI In, SOE Out: Understanding the reallocation effects of FDI liberalization in China," China Economic Review, Elsevier, vol. 96(C).
    • Handle: RePEc:eee:chieco:v:96:y:2026:i:c:s1043951x26000015
    DOI: 10.1016/j.chieco.2026.102651
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