Does Outward Foreign Direct Investment Facilitate China's Export Upgrading?

• Date: 01 September 2020
• DOI: http://doi.org/10.1111/cwe.12328
• Published date: 01 September 2020

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

China & World Economy / 64–89, Vol. 28, No. 5, 2020

64

Does Outward Foreign Direct Investment Facilitate

China’s Export Upgrading?

Song Zhang, Chunlai Chen*

Abstract

This paper empirically investigates the impact of China’s outward foreign direct

investment (OFDI) on its export sophistication. Using a provincial-level panel dataset

and applying fixed effects and instrumental variable regression techniques, the study

fi nds that, on average, OFDI has no signifi cant impact on China’s export sophistication.

However, after the full sample is divided into different regions, the study fi nds that OFDI

has a positive and signifi cant impact on export sophistication in the developed coastal

region, but no such impact is observed in the less developed inland regions. Further

investigation using a panel threshold model reveals that only when GDP, per capita

GDP, human capital, and the research and development intensity of a home economy

reach a certain level can OFDI promote export sophistication. The fi ndings suggest that

accelerating eco nomic development and increasing absorptive capacity can facilitate the

contribution of OFDI to China’s export sophistication.

Key words: absorptive capacity, export sophistication, export structure, outward foreign

direct investment

JEL codes: C26, F19, F21, O33

I. Introduction

Export performance has long been identified as a key driving force of economic

development. In fact, export-led strategy has created many growth miracles in the

East Asian economies.1 However, the pursuit of growth in export quantity alone does

not necessarily lead to sustainable economic growth. Recent research has highlighted

*Song Zhang (corresponding author), Assistant Research Fellow, National Institute of International Strategy,

Chinese Academy of Social Sciences, China. Email: zhangsong@cass.org.cn; Chunlai Chen, Professor, Crawford

School of Public Policy, Australian National University, Australia. Email: chunlai.chen@anu.edu.au. This

research was partially supported by the China Scholarship Council (CSC) and Crawford School of Public Policy,

Australian National Univeristy.

1For example, the economies of Chinese Hong Kong, Chinese Taiwan, Singapore, and South Korea underwent

rapid industrialization and maintained exceptionally high growth rates (in excess of 7 percent a year) between

the early 1960s (mid-1950s for Chinese Hong Kong) and the 1990s.

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

Outward Foreign Direct Investment and Export Upgrading 65

the importance of export composition, or export quality and sophistication, for

economic growth. One of the main fi ndings is that countries promoting exports of more

“sophisticated” goods grow faster (Hausmann et al., 2007; Jarreau and Poncet, 2012).

Since the launch of the reform and opening-up policy in 1978, China’s high

economic growth rate has been largely attributed to the fast growth of exports and high

export value. In 2009, China’s export value was US$1,201.6 billion, ranking fi rst in the

world, a position China has maintained since then.2 With the rapid expansion of export

value, China’s export structure has also changed dramatically in the past 20 years. The

share of high-tech manufactured products in total exports increased from 24.0 percent in

2001 to 34.8 percent in 2018, while the share of labor-intensive products decreased from

53.8 percent to 37.7 percent in the same period.3

China’s outward foreign direct investment (OFDI) has expanded rapidly in the past

decade. China’s OFDI fl ow increased from US$0.9 billion in 2000 to US$145.7 billion in

2015, surpassing FDI infl ow into China. As a result, China’s OFDI stock reached US$1.98

trillion at the end of 2018, ranking third in the world after the US and the Netherlands

(MOC et al., 2019). Chen (2018) and Wu and Chen (2019) found that China’s OFDI had

a positive impact on China’s regional economic grow th and on trade intensities between

China and its trading partners via the transfer of China’s excess production capacity

overseas, moving labor-intensive production to host countries and reverse knowledge

spillovers on China’s domestic economy. However, has China’s OFDI also contributed to

the changes in China’s export structure? This is the main interest of this paper.

The purpose of this study is to empirically investigate whether OFDI can

promote the structure of China’s product export, which is measured by the level of

sophistication. This study makes three contributions to the existing literature on the

relationship between OFDI and export. First, while previous studies mostly focused on

investigating the substitution or complementary effects of OFDI and home economy

exports, this study investigates the impact of OFDI on the export structure of the home

economy (export sophistication). Second, inward FDI (IFDI) has long been studied

and considered as a driver of export upgrading, whereas this study adds OFDI into the

framework, which to our knowledge is the fi rst research to investigate how OFDI can

affect export sophistication of home economies. Third, this study reveals the importance

of the absorptive capacity of home economies in promoting economic performance and

export structure upgrading via OFDI, which is consistent with the FDI literature (e.g.

Xu, 2000; Girma, 2005; Chen, 2011, 2017).

2The data is available from World Trade Organization (WTO) databases.

3Data is calculated based on Lall’s (2000) technological classifi cation of exports using original data collected

from UN Comtrade.