Potential impacts of foreign divestment on China’s high-tech manufacturing industry: a general equilibrium model-based analysis

ABSTRACT

This paper evaluates the potential impacts of foreign divestment on the growth of China’s High-tech Manufacturing industry by developing a dynamic computable general equilibrium (CGE) model that features foreign direct investment (FDI). Simulation results show that when FDI inflow stops, domestic firms substitute foreign firms rapidly, stimulating output relative to the baseline scenario. However, when foreign divestment is continuous or drastic, there are sizable adverse impacts on domestic firms’ output with the decreasing labour productivity relative to the baseline. The further decomposition of labour productivity growth suggests that larger foreign divestment results in a more substantial reduction in technological catch-up and technological change, implying the crucial role of FDI-related technology transfer and spillover in the growth of China’s high-tech manufacturing industry.

KEYWORDS:

• FDI
• divestment
• high-tech manufacturing
• CGE

JEL CLASSIFICATION:

• C68
• C51
• D20
• F20
• L60

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ For example, the new Foreign Investment Law took effect on 1 January 2020, which establishes a new legal framework for managing foreign investment in China.

² Data source: China Statistical Yearbook 2018.

³ According to the 14th Five-Year Plan for National Economic and Social Development of the People’s Republic of China, the core areas of the new infrastructure include Big data, 5 G, UHV, intercity high-speed transit, new energy, artificial intelligence, industrial Internet, etc.

⁴ The detailed model is available upon request.

⁵ Data source: China’s Input-Output Table in 2017; China Statistical Yearbook; China Population and Employment Statistics Yearbook; China Information Industry Yearbook; China Customs Statistics Yearbook; China International Investment Position; Report on Foreign Investment in China from 2003–2020; Report on Investment in China; Statistics on FDI in China from 2004 to 2020.

⁶ We use the average level of FDI from 2015 to 2017 in simulating the baseline scenario.

Additional information

Funding

This work was supported by the Chinese National Funding of Social Sciences [19BTJ038].