Foreign Entry and Profitability of Domestic Firms: Evidence from China

Abstract

Profitability provides a yardstick for judging the operational efficiency, growth, and survival of a business enterprise. This study investigates the determinants of firm profitability in the Chinese manufacturing sector, with a focus on the impact of foreign entry on the profitability of domestic firms. Our findings show an inverted-U relationship between foreign entry and the profitability of domestic firms. Furthermore, we also find that the effect of foreign entry on domestic firm profitability varies according to the ownership structure of domestic firms and the export intensity of foreign newcomers. the 1 percent level. All the independent variables are lagged one year to mitigate simultaneity issues. Region, sector (two-digit industry), and time dummies are not reported, though they are included in all regressions, and are jointly signiªcant in each regression. Regressions were implemented using -xtreg-commands in Stata 11.0.

Foreign Firms and Indigenous Technology Development in the People's Republic of China

“…We find a strong and robust negative effect of FDI on PCMs of firms which suggests that FDI does increase the level of competition in Chinese manufacturing. This result stands in some contrast to studies on countries other than the PRC, which typically find mixed effects of FDI on competition (e.g., Co 2001, Chung 2001, Fu and Wu 2012.…”

“…Chung ( 2001) also finds mixed effects and suggests that the degree of competitive pressure imposed by FDI depends on both the entry mode and the various investment traits. The most interesting paper for our purposes is by Fu and Wu (2012) who study the effect of FDI on profits in Chinese firms. They find an inverted U-shape effect of FDI on profits, where profits tend to increase with smaller inflows of FDI but then decrease with larger flows.…”

Companies profitability under economic instability: evidence from the manufacturing industry in Russia

“…Speaking of the relationship of capital structure of domestic, foreign and joint ownership with profitability, one can refer to the data from an Indian study (Chhibber and Majumdar 1999), in which after controlling for a variety of firm and environment-specific factors, firms display relatively superior performance only when property rights belong to foreign owners at ownership levels providing unambiguous control at 51%. Also, the relationship between foreign entry and profitability of domestic firms has an inverted U-shape (Fu and Wu 2013). Furthermore, we also find that the effect of foreign entry on domestic firm profitability varies according to the ownership structure of domestic firms and the export intensity of foreign newcomers.…”

“…At the same time, our contribution to the research of factors affecting profitability is the consistent patterns that we have identified in relation to groups of factors (production efficiency, internal financial factors, and external financial factors) in an unstable economy. In contrast to other studies of countries with unstable economies (Godart et al 2012;De Backer and Sleuwaegen 2003;Fu and Wu 2013), this paper contains a comprehensive study of the effect of the above-mentioned groups of factors in the context of industries and forms of ownership of enterprises. The obtained results are useful for effective industrial regulation in developing countries in unstable periods.…”

Vertical and Horizontal Spillovers from Foreign Direct Investment: Evidence from Malaysian Manufacturing

“…MNCs targeting their products at global markets are less likely to intensify local product market competition than are MNCs focused on serving the domestic market. Nevertheless, in previous work the market orientation of foreign entrants has not been shown to affect the performance of state-owned enterprises, even though this could affect the operational efficiency of private firms (Fu and Wu 2013).…”