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A fire sale without fire: An explanation of labor-intensive FDI in China

Yasheng Huang, Yue Ma, Zhi Yang and Yifan Zhang ()

Journal of Comparative Economics, 2016, vol. 44, issue 4, 884-901

Abstract: China's labor-intensive industries are characterized by low technology and high competition. The massive inflow of FDI in China's labor intensive industries is inconsistent with the conventional wisdom that FDI should be more prevalent in technology-intensive and low competition industries. To explain this puzzle, we offer a “fire sale” hypothesis: facing severe financial constraints, Chinese private firms give up their equity to form joint ventures with foreign firms in order to obtain financing. Using the garment industry as an example, we find that among domestic firms, the financial constraint index is highest for private firms and lowest for state-owned firms. We further estimate a probit model of joint-venture decisions by private firms. Our results suggest that those private firms with greater financial constraints are more likely to seek foreign joint ownership. The effect of financial constraints on joint venture decision is both statistically and economically significant.

Keywords: FDI; China; Financial constraints (search for similar items in EconPapers)
JEL-codes: F21 L14 O53 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:eee:jcecon:v:44:y:2016:i:4:p:884-901