The impact of outward foreign direct investment on China’s export: an analysis using two-tier stochastic frontier gravity model

Abstract

This study uses country-level panel data covering 173 countries for the period 2003–2015 and employs the two-tier stochastic frontier gravity model to investigate empirically the impact of China’s outward foreign direct investment (OFDI) on its export. The results of this study indicate that China’s OFDI has a positive and statistically significant influence on promoting China’s export. The results for different country groups with different levels of China’s OFDI stock show that the effect of China’s OFDI on promoting China’s export is much higher in the countries with high level of China’s OFDI stock than in the countries with low level of China’s OFDI stock. The results also show that the country-specific constraints emanating from both the ‘behind the border’ factors and the ‘beyond the border’ factors have played a significant role in China’s export growth.

Keywords:

• Export
• outward foreign direct investment
• two-tier stochastic frontier gravity model

JEL Codes:

• F14
• F21
• C2

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 China’s OFDI has been declining since 2017. For example, China’s OFDI flow was $118 billion in 2019, which was a decline of 6% from 2018. This figure dropped again in the first quarter of 2020 by 3.9% compared to the same time a year earlier. One factor in this decline in OFDI flow is that China has tightened control since 2017 to improve its FDI structure, screening outflows and putting limits on some sectors, including entertainment, and preventing blind investment projects overseas. There is also an effort to contain illegal capital flight masquerading as investment (Chen and Findlay 2020).

2 Kumbhakar and Lovell (2003) have argued that using the assumptions of other distributions such as half-normal distribution and Gamma distribution would have no different effects on the results.

3 The average value is the mean of China’s OFDI stock in all the sample countries excluding Hong Kong, because more than half of China’s OFDI flows to Hong Kong. For example, Hong Kong accounted for 66.9% of China’s total OFDI stock in 2015. Including Hong Kong would increase the average value tremendously.

Additional information

Notes on contributors

Song Zhang

Song Zhang is an Assistant Research Fellow at National Institute of International Strategy, Chinese Academy of Social Sciences. He got his PhD degree at Beijing Normal University, China. His latest publication relates to his research interests in foreign direct investment, international trade and development economics.

Kaliappa Kalirajan

Kaliappa Kalirajan is an Emeritus Professor in the Crawford School of Public Policy at the Australian National University. Before joining the Crawford School, he was a Professor of International Economics at the Foundation for Advanced Studies on International Development (FASID) and the National Graduate Institute for Policy Studies (GRIPS) in Tokyo. Before joining FASID and GRIPS, he was Deputy Executive Director to Executive Director, in the Australia South Asia Research Centre at The Australian National University (1994–2000). Research Interests: Modelling and Analysis of Sources of Growth; Regional economic groupings and International Trade; Micro econometric modelling and Policy Analysis; and Low carbon energy systems in Asia. He has authored, co-authored, or edited 18 books published by reputed international publishers. He has published 167 research papers from 1970 to 2021 in the referred reputed academic journals. Currently, he is in the editorial board of 7 academic and policy oriented international journals.

Chunlai Chen

Chunlai Chen is a Professor of economics at the Crawford School of Public Policy, the Australian National University. He is an expert in foreign direct investment, international trade, agricultural economics, and rural development with an emphasis on China’s economy. He has conducted systematic and comprehensive studies on foreign direct investment and its impact on China’s economy. He has also conducted extensive research on China’s agricultural production, marketing, trade policy and liberalisation, and rural development.