FDI Liberalization as a Source of Comparative Advantage in China

Sebastian Claro

Review of Development Economics, 2009, vol. 13, issue 4, 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.

Date: 2009
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