Benefits of Foreign Ownership: Evidence from Foreign Direct Investment in China

59 Pages Posted: 25 Mar 2015

See all articles by Jian Wang

Jian Wang

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Xiao Wang

University of Science and Technology of China

Date Written: March 19, 2015

Abstract

To examine the effect of foreign direct investment, this paper compares the post-acquisition performance changes of foreign- and domestic-acquired firms in China. Unlike previous studies, we investigate the purified effect of foreign ownership by using domestic-acquired firms as the control group. After controlling for the acquisition effect that exists in domestic acquisitions, we find no evidence that foreign ownership can bring productivity gains to target firms. In contrast, a strong and robust finding is that foreign ownership significantly improves target firms' financial conditions and exports relative to domestic-acquired firms. Foreign acquisition is also found to improve output, employment and wage for target firms. These findings confiict with the conventional view of productivity-driven FDI and highlight the financial channel through which FDI benefits the host countries.

Keywords: Foreign direct investment, firm productivity, financial constraints, mergers and acquisitions, China, difference in differences, propensity score matching

JEL Classification: F15, F21, F23, F36, F60

Suggested Citation

Wang, Jian and Wang, Xiao, Benefits of Foreign Ownership: Evidence from Foreign Direct Investment in China (March 19, 2015). Available at SSRN: https://ssrn.com/abstract=2581295 or http://dx.doi.org/10.2139/ssrn.2581295

Jian Wang

The Chinese University of Hong Kong, Shenzhen ( email )

HOME PAGE: http://jianwang.weebly.com

Shenzhen Finance Institute ( email )

Xiao Wang (Contact Author)

University of Science and Technology of China ( email )

China

HOME PAGE: http://https://sites.google.com/site/xiaowangeconomics/

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