Park, Innwon and Park, Soonchan (2010): Modes of foreign direct investment and patterns of trade: Why do multinational enterprises come To China?
Download (543kB) | Preview
This paper investigates the link between patterns of trade and modes of foreign direct investment (FDI) by utilizing exports, imports, and inward FDI data for China over the period 1998 to 2007. We construct a modified gravity equation to find the main modes of inward FDI into China with considering spatially interdependent third country effect. The problem of endogeneity is controlled by applying the system generalized method of moments (GMM) estimation technique. We find that there is no evidence of statistically significant substitutability and complementarity between bilateral trade and FDI in the aggregate data. On the contrary, the trade-diverting third country effect of inward FDI is proven to be strong. As we decompose the aggregate trade goods into final and intermediate goods, we find that there is strong evidence of vertical FDI for importing intermediate goods from the home country and exporting final goods back to the home country. However, the motivation of vertical FDI has been diminishing and the modes of export-platform and complex vertical FDI have begun to emerge. This implies that China has imported intermediate inputs from the home country of FDI, produced final goods or parts and components, and exported them back to the home country. Recently, however, we have noticed that there has been a diversion trend of the vertical linkage from home country to third countries. This indicates that the main mode of inward FDI into China has been shifting from “home export base” to “third country export base”.
|Item Type:||MPRA Paper|
|Original Title:||Modes of foreign direct investment and patterns of trade: Why do multinational enterprises come To China?|
|English Title:||Modes of foreign direct investment and patterns of trade: Why do multinational enterprises come To China?|
|Keywords:||patterns of trade, foreign direct investment, multinational enterprises, China|
|Subjects:||F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms; International Business
F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment; Long-Term Capital Movements
|Depositing User:||Innwon Park|
|Date Deposited:||14. Nov 2010 18:38|
|Last Modified:||13. Feb 2013 11:16|
Anderson, J. and E. van Wincoop. 2003. “Gravity with Gravitas: A Solution to the Border Puzzle.” American Economic Review 93 (1): 170-192.
Arellano, M. and O. Bover, 1995. Another Look at the Instrumental-Variable Estimation of Error Components Models. Journal of Econometrics 68: 29-52.
Baltagi, B. H., P. Egger, and M. Pfaffermayr. 2007. "Estimating Models of Complex FDI: Are There Third-Country Effects?" Journal of Econometrics 140(1): 260-281.
Bergstrand, Jeffrey H. and Peter Egger. 2009. “Finding Vertical Multinational Enterprise Activity.” Mimeo.
Blonigen, Bruce A. 2005. "A Review of the Empirical Literature on FDI Determinants." Atlantic Economic Journal 33(4): 383-403.
Blonigen, B. A., R. B. Davies, G. R. Waddell, and H. T. Naughton. 2007. "FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment." European Economic Review 51: 1303-1325.
Blundell, R.W. and S.R. Bond. 1998. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models. Journal of Econometrics 87: 115-143.
Buckley, Peter and Chen Meng. 2005. “The Strategy of Foreign-invested Manufacturing Enterprises in China: Export-oriented and Market-oriented FDI Revisited.” Journal of Chinese Economic and Business Studies 3(2): 111-131.
Cheng, Leonard K. and Yun K. Kwan. 1999. “What are the Determinants of the Location of Foreign Direct Investment? The Chinese Experience.” Journal of International Economics 51: 379-400.
Ekholm, K., Rikard Forsid, and James R. Markusen. 2007. Journal of the European Economic Association 5(4): 776-795.
Foucault, M., T. Madies and S. Paty. 2008, "Public Spending Interactions and Local Politics. Empirical Evidence from French Municipalities." Public Choice 137: 57-80.
Geishecker, Ingo, Jørgen Ulff-Møller Nielsen, and Konrad Pawlik. 2008. “How Important is Export-Platform FDI? Evidence from Multinational Activities in Poland.” Skriftserie/Working Paper 08-28.
Hausman, J. 1978. “Specification Tests in Econometrics.” Econometrica 46 (6): 1251-1271.
Hayakawa, Kazunobu and Toshiyuki Matsuura. 2009. “Complex Vertical FDI and Firm Heterogeneity: Evidence from East Asia.” IDE Discussion Paper No. 211. Institute of Developing Economies.
Kukenova, M. and J-A. Monteiro. 2009. “Spatial Dynamic Panel Model and System GMM: A Monte Carlo Investigation.” MPRA paper No. 13404.
Madariaga, N. and S. Poncet. 2007. "FDI in Chinese Cities: Spillovers and Impact on Growth." The World Economy 30: 837-862.
National Bureau of Statistics of China. http://www.stats.gov.cn/english/statisticaldata/yearlydata/
Navaretti, Giorgio Barba and Anthony J. Venables. 2004. Multinational Firms in the World Economy. Princeton University Press, Princeton and Oxford.
Organisation for Economic Co-operation and Development. 2009. “Vertical Trade, Trade Costs and FDI.” OECD Trade Policy Working Paper No. 89. OECD.
Polak, J. 1996. “Is APEC a Natural Regional Trading Bloc? A Critique of the Gravity Model of International Trade.” The World Economy 19 (5): 533-43.
United Nations Conference on Trade Development. 2009. Handbook of Statistics.
Whalley, John and Xian Xin. 2010. “China’s FDI and Non-FDI Economies and the Sustainability of Future High Chinese Growth.” China Economic Review 21: 123-135.
World Bank. http://databank.worldbank.org/ddp/home.do?Step=1&id=4
Yeaple, Stephen Ross. 2003. “The Complex Integration Strategies of Multinationals and Cross Country Dependencies in the Structure of Foreign Direct Investment.” Journal of International Economics 60: 293-314.
Zhang, Kevin Honglin and Shunfeng Song. 2000. “Promoting Exports: The Role of Inward FDI in China.” China Economic Review 11: 385-396.
Zhang, Kevin Honglin. 2001. “What Attracts Foreign Multinational Corporations to China?.” Contemporary Economic Policy 19(3): 336-346.