Does Matching with Foreign-Invested Enterprises Improve the Productivity of Chinese Enterprises?

ABSTRACT

Rapid expansion of China’s exports and inward foreign direct investment (FDI) are characteristic of China’s outward-oriented economy. Based on a unique micro-level survey on the co-development between domestic enterprises and foreign-invested enterprises in Kunshan County of Jiangsu Province, this paper finds that domestic enterprises can improve their productivity by matching (in terms of supply, processing, or original equipment manufacturer [OEM] relationship) with foreign-invested enterprises. A self-selection mechanism of matching is at work for domestic enterprises involved in exports: when foreign-invested enterprises operate in China, domestic enterprises compete to match with them, which eventually helps them improve. Empirical analysis supports the emergence of this mechanism, together with a learning-by-exporting effect and a peer effect. In addition, with respect to the peer effect, the improvement in productivity at domestic enterprises whose main product is intermediate inputs depends more on skilled or high-quality labor, while that of domestic enterprises whose main products are capital and consumable products depend more on management staff.

KEY WORDS:

• matching
• peer effect
• productivity
• self-selection

JEL:

• F10
• F23

Notes

1. In our survey, if a supply, processing, or original equipment manufacturer (OEM) relationship is found between domestic enterprises and foreign-invested enterprises, then a matching relationship exists.

Additional information

Funding

Zhang acknowledges the financial support from Jiangsu Social Science Fund (China) [No. 17WTA008].