Outward FDI and Domestic Input Distortions: Evidence from Chinese Firms

Abstract

This paper examines how domestic distortions affect firms' investment strategies abroad. The study first documents puzzling empirical findings concerning Chinese multinational corporations, which include that private multinational corporations are less productive than state-owned multinational corporations. A theoretical model is built to rationalize these findings and yields additional empirically consistent predictions. The key insight is that discrimination against private firms domestically incentivizes these firms to produce abroad, which results in less tough selection into foreign direct investment for them. A calibration exercise shows the quantitative impacts of domestic distortions on gains in aggregate productivity after investment liberalization.