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The Effects of Foreign Direct Investment on Industrial Growth: Evidence from a Regulation Change in China

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  • Mitsuo Inada

    () (Graduate School of Economics, Kyoto University)

Abstract

Inward foreign direct investment (FDI) in China has been accompanied by rapid economic growth. A growing literature has emerged in recent years examining the role of FDI on Chinese economic growth. However, measuring the e?ects of FDI has been challenging, because other fac- tors which in?uence ?rms?productivity occur in parallel with FDI, and because economic growth also simultaneously attracts FDI. To address these endogeneities, this paper analyzes the e?ects of a change in the FDI regulations on the productivity growth of Chinese industries using Chinese industry-level panel data. In 2002, the Chinese government lifted its regulations on the entry of foreign a¢ liates, which has made it substantially easier for foreign ?rms to engage in FDI in a?ected industries. As a result of this regulation change, our di?erence-in-di?erences estimates show that these industries experienced signi?cantly larger increases in foreign ?rms?total sales, exports, and domestic sales. We also ?nd that this increase in FDI resulted in an increase in labor productivity and in total factor productivity (TFP) of the a?ected industries and local industries, but we do not ?nd that they experienced signi?cantly larger in?ows of FDI or productivity growth before 2002, which provides evidence against endogeneity concerns. The results above are su¢ - ciently robust to include changes in industrial tari? reduction as controls. These ?ndings suggest that the growth of foreign sales and TFP in a?ected industries is not well explained except by the e?ects of regulation changes.

Suggested Citation

  • Mitsuo Inada, 2013. "The Effects of Foreign Direct Investment on Industrial Growth: Evidence from a Regulation Change in China," KIER Working Papers 856, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:856
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP856.pdf
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    References listed on IDEAS

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    1. Sourafel Girma & Yundan Gong, 2008. "FDI, Linkages and the Efficiency of State-Owned Enterprises in China," Journal of Development Studies, Taylor & Francis Journals, vol. 44(5), pages 728-749.
    2. Lin, Ping & Liu, Zhuomin & Zhang, Yifan, 2009. "Do Chinese domestic firms benefit from FDI inflow?: Evidence of horizontal and vertical spillovers," China Economic Review, Elsevier, vol. 20(4), pages 677-691, December.
    3. Du, Luosha & Harrison, Ann & Jefferson, Gary, 2014. "FDI Spillovers and Industrial Policy: The Role of Tariffs and Tax Holidays," World Development, Elsevier, vol. 64(C), pages 366-383.
    4. Brambilla, Irene, 2009. "Multinationals, technology, and the introduction of varieties of goods," Journal of International Economics, Elsevier, vol. 79(1), pages 89-101, September.
    5. 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.
    6. Ran, Jimmy & Voon, Jan P. & Li, Guangzhong, 2007. "How does FDI affect China? Evidence from industries and provinces," Journal of Comparative Economics, Elsevier, vol. 35(4), pages 774-799, December.
    7. Filip Abraham & Jozef Konings & Veerle Slootmaekers, 2010. "FDI spillovers in the Chinese manufacturing sector," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(1), pages 143-182, January.
    8. Albert G. Z. Hu & Gary H. Jefferson & Qian Jinchang, 2005. "R&D and Technology Transfer: Firm-Level Evidence from Chinese Industry," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 780-786, November.
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    Cited by:

    1. Mitsuo Inada & Yung-Hsing Guo, 2016. "Heterogeneous Impacts of a Change in Chinese FDI Regulations on Domestic Market Outcomes: Empirical Evidence from Taiwanese Plant Data," KIER Working Papers 934, Kyoto University, Institute of Economic Research.
    2. repec:bla:jecrev:v:68:y:2017:i:2:p:232-243 is not listed on IDEAS

    More about this item

    Keywords

    Foreign Direct Investment; Regulation Change; Industrial Growth; Technology Spillovers; Difference-in-Differences.;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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