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

Author

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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 aï¿ 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 suï¿ - 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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    References listed on IDEAS

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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. Bin Ni & Yasuyuki Todo & Tomohiko Inui, 2017. "How Effective are Investment Promotion Agencies? Evidence from China," The Japanese Economic Review, Springer, vol. 68(2), pages 232-243, June.
    3. INADA Mitsuo, 2019. "Promotion or Liberalization: The Effect of Targeted Investment Policies on FDI Inflows," Discussion papers 19071, Research Institute of Economy, Trade and Industry (RIETI).
    4. Mitsuo Inada, 2022. "Promotion or liberalization: The effect of targeted investment policies on foreign direct investment inflows," Pacific Economic Review, Wiley Blackwell, vol. 27(5), pages 489-505, December.

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    More about this item

    Keywords

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

    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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