Chinese Outward Foreign Direct Investment and Industrial Upgrading from the Perspective of Differences among Countries

• DOI: http://doi.org/10.1111/cwe.12330
• Date: 01 May 2020
• Published date: 01 May 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–28, Vol. 28, No. 3, 2020

1

Chinese Outward Foreign Direct Investment and

Industrial Upgrading from the Perspective of

Differences among Countries

Hao Chen, Jiadong Pan, Wen Xiao*

Abstract

This paper constructs a two-sector model to identify the effects of outward foreign direct

investment (OFDI) in different countries on China’s industrial upgrading and conducts

an empirical analysis using provincial-level panel data from 2003–2015. The results

show that China can benefi t from industrial upgrading via OFDI in developed countries

by way of reverse technology spillover. This effect is signifi cant in the eastern region, but

not in the central and western regions. China can also benefi t from industrial upgrading

via OFDI in developing countries and countries along the Belt and Road through

marginal industrial transfer. This effect is more signifi cant in the central region, followed

by the western and eastern regions. Our results imply that China should promote

technology-seeking OFDI in developed countries, and enhance effi ciency-seeking OFDI

in developing countries, especially in countries along the Belt and Road.

Key words: industrial upgrading, marginal industrial transfer, outward foreign direct

investment, reverse technology spillover

JEL codes: F21, F23, L16

I. Introduction

Outward foreign direct investment (OFDI) and domestic industrial upgrading have always

been hot topics in the international economic fi eld (Mathews, 2006; Stefano et al., 2009;

Lu et al., 2017). Since the “Going Global” strategy was implemented in 2002, China’s

OFDI has soared at an average annual rate of 35.9 percent (MOC et al., 2015). In 2014,

investment fl owing from China to foreign countries surpassed that fl owing from foreign

*Hao Chen, Lecturer, School of Economics and Management, Zhejiang University of Science and Technology,

China. Email: checon1990@126.com; Jiadong Pan, Lecturer, Zhejiang Institute of Administration, China.

Email: pjdxyz@163.com; Wen Xiao (corresponding author), Professor, College of Economics, Zhejiang

University, China. Email: xiao_w80@hotmail.com. The authors are grateful for support from the National

Social Science Fund of China (No. 19BJY178).

Correction added on 26 June 2020, after initial online publication. A duplicate of this article was published under the

DOI 10.1111/cwe.12295. This duplicate has now been deleted and its DOI redirected to this version of the article.

Hao Chen et al. / 1–28, Vol. 28, No. 3, 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

2

countries to China for the fi rst time, and China became a net capital exporter. In 2017,

China’s OFDI fl ow reached US$158.29bn and the year-end stock stood at US$1809.04bn

(MOC et al., 2017),1 accounting for 11.1 and 5.9 percent of the global fl ow and stock

in 2017, respectively. In 2017, China’s flow and stock ranked third and second in the

world, respectively. China put forward the Belt and Road Initiative (BRI) in 2013,

which injected new vitality into China’s OFDI. In 2017, OFDI flow to Belt and Road

(B&R) countries reached US$20.17bn and the year-end stock stood at US$154.40bn. As

Chinese enterprises are going global on a large scale, the Chinese economy has entered

a “new normal” characterized by a slowdown in economic growth, structural adjustment

and stimulus policy digestion. A number of problems, including resource shortage,

environmental destruction, technical bottlenecks and irrational industrial structure,

are becoming increasingly serious (Zhang et al., 2014; Bloch et al., 2015; Nosov and

Tseplyaeva, 2016). On the one hand, the extensive economic growth pattern under which

China participates in international competition, based on low costs of production factors

and at the expense of resources and the environment, has become diffi cult to sustain. On

the other hand, there is a high capacity for excess production in the traditional industries

represented by cement, glass and clothing; the advanced manufacturing industry and

strategic emerging industries are less cultivated because of insufficient research and

development (R&D) and the subsequent lack of innovation. Against such a background,

OFDI has become an important measure to push the transformation and upgrade of

China’s industrial structure.

This paper explores China’s OFDI and home country industrial upgrading from

the perspective of the differences among countries, and further classifies them into

developed countries and developing countries. According to the classifi cation standards

specified by the World Investment Report 2018 and Amann and Virmani (2015), we

select 18 developed and countries (territories) and 40 developing countries (territories)

to conduct our research.2

China’s OFDI in developed countries has been mainly concentrated in advanced

1All data cited in Section I was obtained from this source.

2The 18 developed countries are: Australia, Canada, France, Germany, Hungary, Italy, Japan, Luxembourg, the

Netherlands, New Zealand, Norway, Russia, Singapore, South Korea, Spain, Sweden, the United Kingdom

and the United States. The 40 developing countries are: Algeria, Angola, Argentina, Brazil, Cambodia,

Congo (Bulgaria), Congo (Kinshasa), Ecuador, Ethiopia, Ghana, India, Indonesia, Iran, Kazakhstan, Kenya,

Kyrgyzstan, Laos, Malaysia, Mauritius, Mexico, Mongolia, Myanmar, Nigeria, Pakistan, Papua New Guinea,

Peru, the Philippines, Saudi Arabia, South Africa, Sudan, Tajikistan, Tanzania, Thailand, Turkey, United Arab

Emirates, Uzbekistan, Venezuela, Vietnam, Zambia and Zimbabwe. To avoid the impact of tax avoidance

investment, the following five regions are not included in the analysis: Bermuda, British Virgin Islands,

Cayman Islands, Chinese Hong Kong and Macao.