A Fire Sale without Fire: An Explanation of Labor-Intensive FDI in China

35 Pages Posted: 8 Sep 2008

See all articles by Yasheng Huang

Yasheng Huang

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Yue Ma

City University of Hong Kong (CityU) - Department of Economics & Finance

Zhi Yang

The University of Hong Kong - Faculty of Business and Economics

Yifan Zhang

Sun Yat-sen University (SYSU) - Department of Economics

Date Written: August 1, 2008

Abstract

Using a large firm-level panel dataset from the Chinese National Bureau of Statistics, we examine the effect of financial distortions on FDI inflows in China's labor-intensive industries. Following Whited and Wu (2006), we estimate the investment Euler equation and construct a financing constraint index for each firm. We find that among domestic firms, the financing constraint index is highest for private firms and lowest for state-owned firms. This finding is consistent with the political pecking order hypothesis that states that there is a severe lending bias in China's financial system against private firms in favor of state-owned enterprises. Then we estimate a probit model of joint-venture decisions by private firms. We show that firms with greater financing constraints are more likely to be acquired and controlled by foreign firms. We interpret this evidence to be consistent with the fire-sale hypothesis that states that private firms relinquish their equity and control to foreign investors in order to raise financing for growth. We find that those firms in the top 25 percent of the most financing constraints could have avoided losing 31.5 percent of the equity share to foreigners had they faced the same favorable financing constraints as a typical firm in Zhejiang Province.

Keywords: FDI, China, Fire Sale

JEL Classification: F21, L14, O53

Suggested Citation

Huang, Yasheng and Ma, Yue and Yang, Zhi and Zhang, Yifan, A Fire Sale without Fire: An Explanation of Labor-Intensive FDI in China (August 1, 2008). MIT Sloan Research Paper No. 4713-08, Available at SSRN: https://ssrn.com/abstract=1263907 or http://dx.doi.org/10.2139/ssrn.1263907

Yasheng Huang (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Yue Ma

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/yuema24

Zhi Yang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yifan Zhang

Sun Yat-sen University (SYSU) - Department of Economics ( email )

8 Castle Peak Road
Tuen Mun, NT
Hong Kong

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