Institutional Environment, OFDI, and TFP Growth: Evidence from China

ABSTRACT

Using Chinese Industrial Enterprise Database and Foreign Investment Enterprises database (2003–2007), this article studies the impact of institutional environment and outward foreign direct investment (OFDI) on total factor productivity (TFP) at firm and provincial level. The results show that good institutional environment is conducive to firm and provincial level TFP growth, OFDI also proves to be positive. Considering spatial correlation, provinces with strong TFP have negative impact on adjacent provinces. For different ownership enterprises in home country, favorable institutional environment promotes the TFP growth of private enterprises, while OFDI has a significant positive effect on the TFP growth of both private and foreign-invested enterprises, the TFP of private enterprises show obvious polarization effect.

KEY WORDS:

• institutional environment
• OFDI
• SDM
• spatial econometric analysis
• TFP

Funding

This article is financially supported by the Fundamental Research Funds for the Central Universities of Sichuan University (number skqy201624) and National Natural Science Foundation of China (number 71203149; 71773081).

Notes

^1. Here, “Institutional Environment” refers to the “Economic Freedom and Marketization Degree”; we use the “Marketization index” constructed by Fan, Wang, and Zhu (2011) to be the proxy variable for this.

^2. We also calculate the TFPs using spatial econometric approaches on provincial level, please see “Spatial Econometric Analysis” section.

^3. According to the scale of China’s OFDI flow, R&D capital stock of destinations and data availability, such 18 countries/regions are selected as samples of international R&D capital stock as Australia, Canada, France, Germany, Hungary, Italy, Japan, Korea, Netherlands, Mexico, Spain, Sweden, the United Kingdom, the United States, Hong Kong, Singapore, Russia, and Brazil. As of the end of 2012, China’s OFDI stock toward those countries/regions accounts for over 80% of the total OFDI stock (Statistical Bulletin of China’s OFDI 2012), which makes those samples quite representative.

^4. For the robustness, we use PSM to estimate and compare the results with Spatial Econometric Analysis. From the result, we find that the enterprises who have OFDI behavior can promote TFP significantly increased by 4.6%, and it is slightly lower than the 6% or so in the article.

Additional information

Funding

This article is financially supported by the Fundamental Research Funds for the Central Universities of Sichuan University (number skqy201624) and National Natural Science Foundation of China (number 71203149; 71773081).