The Influence of Comparative Advantage on FDI in China
49 Pages Posted: 23 Apr 2024 Last revised: 26 Apr 2024
Date Written: May 01, 2024
Abstract
This paper examines the horizontal and vertical motives of FDI in China during the years 1998 to 2007. Utilizing international datasets on trade flows, tariffs, and transport costs alongside a detailed firm-level dataset, it achieves greater industry disaggregation than previous literature on the determinants of inward FDI in China. Results show over 2/3rds of Chinese industries undergoing significant dynamics in the main proxy for the vertical motive of FDI-revealed comparative advantage (RCA) estimated a la Costinot et al. (2012). GMM as well as a "quasi-leave-one out" IV approach show that while the vertical motive of FDI dominates overall, horizontal motives are strong for non-HKMT (Hong Kong, Taiwan, Macau) FDI. Given that previous literature emphasizes the positive spillovers of non-HKMT FDI to local firms, these findings suggest that allowing domestic market access may be a vital prerequisite to such spillovers, i.e., not only export promotion. Further, horizontally motivated FDI also functions as an export platform, emphasizing the importance of minimizing trade barriers. Finally, China's provincial-level RCA accounts for 1/4th of RCA's association with FDI, and the positioning of provinces is divergent from one another, indicating a heterogeneous and dynamic landscape.
Keywords: Foreign Direct Investment (FDI), China, Comparative Advantage, Vertical FDI, Determinants of FDI F14, F21, F23, F63
JEL Classification: F14, F21, F23, F63
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