Does the reduction of regional trade policy uncertainty increase Chinese enterprises' outward foreign direct investment? Evidence from the China−ASEAN Free Trade Area

• Published date: 01 May 2020
• Author: Linhui Yu,Kexuan Zhou,Lin Sun
• Date: 01 May 2020
• DOI: http://doi.org/10.1111/1468-0106.12331

SPECIAL ISSUE ARTICLE

Does the reduction of regional trade policy

uncertainty increase Chinese enterprises'

outward foreign direct investment? Evidence

from the China−ASEAN Free Trade Area

Lin Sun

1

| Kexuan Zhou

1

| Linhui Yu

2

1

School of Economics, Zhejiang University of Technology, Hangzhou, China

2

School of Economics, Zhejiang University, Hangzhou, China

Correspondence

Lin Sun, School of Economics, Zhejiang

University of Technology, No. 288, Liu-

He Road, Hangzhou, Zhejiang Province

310023, China.

Email: sunlin@zjut.edu.cn

Linhui Yu, School of Economics,

Zhejiang University, Hangzhou, Zhejiang

Province 310023, China.

Email: yulh@zju.edu.cn

Abstract

Regional trade policy uncertainty is an important factor

affecting enterprises' outward foreign direct investment

(OFDI). This paper uses the China−ASEAN Free Trade

Area as the research object. The research uses the

“China Industrial Firm Database”from 2001 to 2013

and the “List of Chinese Overseas Investment Enter-

prises (Institutions)”to match micro-enterprise data.

Using the difference-in-difference (DID) approach to

construct quasi-natural experiments, we study the

impact of the reduction in regional trade policy uncer-

tainty on Chinese enterprises' OFID. The results show

that the free trade agreement strategy implemented by

China has reduced the regional trade policy uncer-

tainty, which has had a significant positive impact on

Chinese enterprises' OFDI. The establishment of the

China−ASEAN Free Trade Area has significantly

increased Chinese enterprises' OFID in ASEAN coun-

tries. The study further finds that enterprises of differ-

ent ownership types, in different regions and of

different factor intensities display heterogeneous effects

in this process. The empirical results of the paper pro-

vide new ideas for promoting OFDI from the stand-

point of reducing regional trade policy uncertainty, and

Received: 2 April 2020 Accepted: 9 April 2020

DOI: 10.1111/1468-0106.12331

Pac Econ Rev. 2020;25:127–144. wileyonlinelibrary.com/journal/paer © 2020 John Wiley & Sons Australia, Ltd 127

also provide a new perspective for explaining the

increase in foreign investment in China in recent years.

KEYWORDS

China–ASEAN Free Trade Area, outward foreign direct investment,

regional trade policy uncertainty

1|INTRODUCTION

Since the beginning of the new century, the emergence of various “black swan”events such as

the US financial crisis, Europe's debt crisis, Brexit, and the Sino–US continuous trade frictions,

have led to a significant increase in global political and economic instability, and trade policy

uncertainty has also risen sharply. According to the Economic Policy Uncertainty Index (Baker,

2016), the global trade policy uncertainty reached its the highest level in 2016. The global multi-

lateral trade coordination mechanism of the World Trade Organization (WTO) has failed to

play a role in reducing the recent trade turmoil. As a consequence, countries are experiencing

significant losses as the global trade friction intensifies. However, the regional coordination

mechanism of free trade areas (FTA) has significantly reduced the trade policy uncertainty

within specific regions.

The Chinese Government has also accelerated the promotion of the FTA strategy in recent

years. As of March 2018, the Chinese Government had signed 16 free trade agreements involv-

ing 24 countries and regions. The China–ASEAN FTA (CAFTA) is the largest FTA that China

has participated in so far. The China–ASEAN Comprehensive Economic Cooperation Frame-

work Agreement (hereafter referred to as the Framework Agreement) was signed by all parties

in 2002, and the CAFTA was officially established in 2010. FTA have contributed greatly to the

healthy and stable growth of global trade by reducing the uncertainty of trade policies.

The Chinese Government has also paid more attention to businesses “going global”.

1

Recently, China's economy has shown a “new normal”pace as the growth of the economy has

been slowing down. With the overcapacity of industries and the decrease in demand, businesses

in China are facing tough challenges. When enterprises engage in outward foreign direct invest-

ment (OFDI), they will be able to better integrate into the global production and management

system, and make full use of domestic and international resources to rapidly enhance their core

competitiveness, and then obtain greater development space.

Since 2000, Chinese companies' OFDI has grown at an accelerating rate (Davies, 2010);

however, there is still a huge gap between the scale and quality of OFDI compared with inward

foreign direct investment (FDI) to China. To speed up the pace of Chinese enterprises' engage-

ment in OFDI, the Report of the 17th National Congress of the Communist Party of China

(CPC) put forward a strategy of integrating inward FDI and OFDI. The 18th National Congress

of the CPC clearly stated that it was necessary to speed up the pace of OFDI, to help Chinese

enterprises become more competitive during the internationalization process. One of the

focuses in the report of 19th CPC National Congress is the Belt and Road Initiative, which

emphasizes the importance of IFDI and OFDI strategies. This initiative encourages companies

to use innovative foreign investment methods, to engage in international cooperation, and

accelerate the development of economic integration and competition. Meanwhile, the imple-

mentation of the CAFTA Framework Agreement has significantly reduced the regional

128 SUN ET AL.