Foreign divestment as a catalyst for indigenous innovation and manufacturing upgrading: Evidence from China's power sector

The existing literature on the impact of economic decoupling is inconclusive and lacks sufficient empirical evidence. This paper examines the impact of economic decoupling on green productivity of power utilities, focusing on the foreign divestment (FD) activities in China's power industry from 1999 to 2013. The study uses a panel dataset compiled from several databases, including industrial enterprise data, regional macro data, customs data, firm patent data, and manufacturing emissions data. To identify the direct impact of FD, we construct a shock intensity indicator of FD using the base-period foreign investment share of power utilities and regional FD events. Additionally, an input-output table is used to construct an industry dependence indicator to identify spillovers to the manufacturing sector. The findings provide robust empirical evidence that FD served as a significant driver of accelerated productivity growth in the power sector. The growth can be attributed to two factors: indigenous innovation in power utilities and import substitution in manufacturing. The acceleration of indigenous innovation can be attributed to the demand for risk hedging spurred by FD, while the strengthening of domestic manufacturing capabilities stems from a market filling effect. These findings underscore the importance of strengthening indigenous innovation and domestic manufacturing to mitigate and reverse the adverse impacts of economic decoupling, thereby illuminating how domestic firms can navigate such challenges.