Foreign direct investment and export quality upgrading in China's manufacturing sector

Abstract

Using a Melitz-type theoretical model of firm heterogeneity, we show that (i) the presence of foreign firms within an industry affects the industry export quality and (ii) the industry export quality is directly related to the industry export price. As the industry export price can be approximated by the industry export unit value, our work provides a rigorous theoretical justification for several empirical studies that use export unit value as a proxy for export quality. We then convert our theoretical model-based structural relationships into a system of equations. Using industry level panel data from China's manufacturing sector, and measuring the industry export quality by the industry export unit value, we find that an increase in foreign presence in China's manufacturing sector contributes to a significant increase in China's export quality. We also distinguish between foreign presence in China originating from the Hong Kong, Macao and Taiwan (HMT) and non-HMT regions. We find that foreign presence in China's manufacturing sector that originates from the HMT region leads to a much larger increase in China's export quality. The main empirical result is found to be robust with respect to alternative measures of foreign presence and aggregate demand.

Does Outward Foreign Direct Investment Facilitate China's Export Upgrading?

“…The positive impact of IFDI on export sophistication is consistent with most previous studies (Harding and Javorcik, 2012;Zhu and Fu, 2013;Anwar and Sun, 2018). However, we should be cautious about making the conclusion that OFDI has no significant effect on China's export sophistication.…”

“…The indirect effect occurs via the spillover effects of FDI on local fi rms. Therefore, the presence of FDI tends to generate a more sophisticated export structure in host countries (Harding and Javorcik, 2012;Zhu and Fu, 2013;Anwar and Sun, 2018). Another external factor affecting export sophistication is trade.…”

“…To alleviate the potential endogeneity problem, we adopt the fi xed effects and instrumental variable (FE-IV) technique for estimation. To estimate the impact of OFDI on export sophistication, we control for the impact of IFDI on export sophistication (Harding and Javorcik, 2012;Zhu and Fu, 2013;Anwar and Sun, 2018). The empirical regression equation is specifi ed as follows:…”

Does foreign investment benefit the exporting activities of Vietnamese firms?

“…By making use of GMM estimation applied to panel data over the 2005–07 period for six manufacturing industries in China, Sun and Anwar () find that foreign investment promotes domestic firms' involvement in exports through raising competition in the textile industry. Anwar and Sun () estimate a Melitz‐type model using panel data for the Chinese manufacturing sector and show that an increase in the presence of foreign direct investment leads to a significant increase in the export quality of China's manufacturing sector, especially in Hong Kong, Macao and Taiwan.…”

Foreign Entry Liberalization and Export Quality: Evidence From China

“…Recent literature has shown that within-industry FDI entry has a large impact on export quality (e.g. Faruq, 2010;Harding and Jarvocik, 2012;Zhu and Fu, 2013;Amighini and Sanfilippo, 2014;Anwar and Sun, 2018). None of these studies have examined the across-industry effect of FDI liberalization policy yet.…”