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Fair competition and investment behavior of foreign-invested firms—Evidence from a quasi-natural experiment in China

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  • Huang, Xiaodi
  • Chen, Xiaoxiong
  • Liang, Zuming
  • Wu, Hongjie
  • Kang, Siyang

Abstract

This study systematically investigates the effect of fair competition on the investment of foreign-invested firms by utilizing China's Fair Competition Review System in 2016 as an exogenous shock. Particularly, we run a triple-difference regression based on the type and location of firms. The findings demonstrate that the improvement of fair competition significantly increases fixed asset investment in foreign-invested firms relative to domestic firms, particularly in firms with strong financial constraints, high operational uncertainty, high capital intensity and in regions with low financial development and high economic policy uncertainty. Further mechanism tests show that fair competition significantly promotes foreign-invested firms’ access to bank credit and reduces their perceived uncertainty, thus increasing investment, compared to domestic firms. In addition, labor employment, total factor productivity, operating income and R&D investment of foreign-invested firms have also significantly increased. Overall, our evidence highlights the active role of fair competition in promoting foreign-invested firms’ investment compared to domestic firms.

Suggested Citation

  • Huang, Xiaodi & Chen, Xiaoxiong & Liang, Zuming & Wu, Hongjie & Kang, Siyang, 2025. "Fair competition and investment behavior of foreign-invested firms—Evidence from a quasi-natural experiment in China," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 2234-2246.
    • Handle: RePEc:eee:ecanpo:v:85:y:2025:i:c:p:2234-2246
    DOI: 10.1016/j.eap.2025.03.002
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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M16 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - International Business Administration

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