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

Mitsuo Inada

No 856, KIER Working Papers from Kyoto University, Institute of Economic Research

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.

Keywords: Foreign Direct Investment; Regulation Change; Industrial Growth; Technology Spillovers; Difference-in-Differences. (search for similar items in EconPapers)
JEL-codes: F21 O33 O38 O43 (search for similar items in EconPapers)
Pages: 49pages
Date: 2013-04
New Economics Papers: this item is included in nep-dev, nep-eff, nep-fdg and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:856

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