FDI Liberalization as a Source of Comparative Advantage in China

Sebastian Claro

Review of Development Economics, 2009, vol. 13, issue 4, pages 740-753

Abstract: Two features of China's trade patterns suggest that elements beyond factor abundance explain its export performance. The high penetration in world markets of labor-intensive products has been accompanied by: (i) a high share in exports of productivity-advanced foreign-invested enterprises (FIEs) and (ii) a high penetration of FIEs in labor-intensive sectors. We show that FDI liberalization endogenously introduces Ricardian features to an otherwise standard endowment-based trade model, strengthening China's natural comparative advantage in labor-intensive products. We discuss how capital accumulation, productivity growth, rural-urban migration, incentives for foreign investment, and distortions in financial markets affect this bias. Copyright © 2009 Blackwell Publishing Ltd.

Date: 2009

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