FDI Liberalization and Productivity Dispersion: Evidence from China's FDI Deregulation

Abstract

This paper empirically investigates whether FDI liberalization affects productivity dispersion, a potential source of resource misallocation. The identification uses the FDI deregulation policy implemented by the Chinese government in 2002, in which some industries became being foreign investment encouraged from being restricted. Using firm-level data that cover most of the manufacturing sectors in China for the period 1998-2007, our difference-in-differences estimation results show that FDI deregulation policy reduces productivity dispersion implying an improvement of resource reallocation. Moreover, the exiting of zombie firms contributes to the positive effect of FDI liberalization on the efficiency of resources allocation. In addition, the heterogeneous analyses suggest that the comparative disadvantage industries are more sensitive to FDI liberalization.

Keywords: FDI Deregulation, Productivity Dispersion, Resource Misallocation