Foreign direct investment, domestic sales and exports of local firms: a regional perspective from China

ABSTRACT

Using a simultaneous equations model, this paper investigates how/whether the presence of foreign direct investment (FDI) affects the performance of local firms in China's (1) leather shoe manufacturing and (2) textile and garment manufacturing industries. We use the value of sales (total revenue) as a measure of firm performance in domestic and export markets. The distinguishing feature of this paper is the use of an FDI presence measure that takes the regional dimension into account. The empirical analysis presented in this paper reveals that the presence of FDI leads to a significant positive impact on the domestic sales and export intensity of local firms in both industries. This result is found to be robust to alternative measures of FDI. Based on the result, it is recommended that, in order to maximize the benefits from inward FDI, Chinese policy-makers must encourage domestic and foreign-invested firms to locate in close geographical proximity.

KEYWORDS:

• FDI
• domestic sales
• export, China
• textile and garment manufacturing industry
• leather shoe manufacturing industry

JEL classification:

• D22
• F14
• L25
• O12

Acknowledgements

This paper has greatly benefited from very useful comments received from the reviewers of the Journal of Asia Pacific Economy. The authors are solely responsible for all remaining errors and/or omissions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. A good survey of the related literature can be found in, among others, Gorg and Greenway (2004), Saggi (2002) and Smeets (2008).

2. Later in our empirical analysis, we also use time dummies to control for the impact of time–industry variation.

3. These instruments are constructed using both domestic and foreign firms.

4. One may suspect that the regional dimension is subject to clustering. However, the distribution of FDI presence does not provide any evidence of provincial clustering.

Additional information

Notes on contributors

Sajid Anwar

Sajid Anwar is a professor of finance at University of Sunshine Coast. His current research deals with the impact of foreign investment and the related spillover effects on productivity and sectoral growth.

Sizhong Sun

Sizhong Sun is a senior lecturer in economics at James Cook University. His research is located in the broad areas of empirical international trade, empirical industrial organization, economics and governance, and economic development, with a focus on foreign direct investment and Chinese economy.