Foreign Ownership and International Trade Performance in China

• Published date: 01 March 2024
• Author: Zhiyuan Li,Yichun Lin,Mingyao Xu
• Date: 01 March 2024
• DOI: http://doi.org/10.1111/cwe.12525

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 42–72, Vol. 32, No. 2, 2024

42

Foreign Ownership and International Trade

Performance in China

Zhiyuan Li, Yichun Lin, Mingyao Xu*

Abstract

We investigate the causal relationship between foreign ownership and international

trade performance by comparing foreign-acquired firms with similar domestic-acquired

firms in China with regard to changes in their post-acquisition international trade

performance. Our findings indicate that foreign ownership significantly enhanced the

probability of both exporting and importing, and strongly increased trade value. Foreign

ownership took effect from the year of the acquisition and persisted for at least 2 years.

It stimulated both processing trade and ordinary trade, and expanded products and

trading partners. Post-acquisition trade performance also exhibited heterogeneity based

on the different pre-acquisition and post-acquisition ownership. As for the underlying

mechanisms, we show that firms experienced significant output expansion, increased

export dependence, and eased financial constraints after foreign acquisition.

Keywords: domestic acquisition, foreign acquisition, foreign ownership, international

trade performance

JEL codes: F14, F23, F68

I. Introduction

Firms partly or fully owned by foreign investors contribute to a substantial percentage

of a country’s international trade.1 The existing literature largely considers the impacts

of foreign capital on firm performance but it lacks a comprehensive discussion of

international trade performance. What does foreign ownership mean to a firm’s

international trade performance? Does foreign ownership encourage firms to enter the

global market?

*Zhiyuan Li (corresponding author), Professor, School of Economics, Fudan University; Shanghai Institute of

International Finance and Economics, China. Email: zhyli@fudan.edu.cn; Yichun Lin, PhD Candidate, School

of Economics, Fudan University, China. Email: yclin20@fudan.edu.cn; Mingyao Xu, PhD Candidate, School

of Economics, Fudan University, China. Email: myxu20@fudan.edu.cn. This work was supported by the

National Natural Science Foundation of China (Nos. 72273035, 72121002, and 42341205); the Major Project

of the Key Research Base of the Ministry of Education, China (No. 22JJD790012).

1On average, foreign-invested firms contributed to 49 percent of China’s exports during 2011–2013, and most

of these foreign-invested firms’ exports were in the form of processing exports.

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Foreign Ownership and International Trade Performance 43

Our main interest in this paper is in the causal relationship between foreign ownership

and firms’ international trade performance. Figure 1 shows that, during the early 1990s

and 2000s in China, the number of foreign acquisitions with Chinese firms as the sellers

surged in two waves, and trade volume soared during these periods. However, the

parallel trends do not tell us how much of this correlation is causal. Simply comparing

domestic firms and foreign-owned firms also fails to answer this question, as the

different establishment decisions of foreign investors and domestic investors raise

numerous issues related to endogeneity.

Figure 1. Foreign acquisition and trade of China

Source: Compiled by the authors based on WIND database.

Notes: This figure plots the time series of the aggregated number of foreign acquisition cases and international

trade volume of China during 1978–2013. The solid line plots the number of foreign acquisition cases in

which Chinese firms act as the seller (left axis), and the two dashed lines plot China’s aggregate volume

of exports and imports (right axis).

In this paper, we examine the causal impact of foreign ownership on firms’

international trade performance, with our identification strategy based on foreign

acquisitions. Combining three firm-level datasets, the Chinese Industrial Enterprises

Database, Chinese Customs Database, and the Chinese Industrial and Commercial

Registration Database, we construct a firm-level panel data covering 2000–2013, with

detailed information on firms’ ownership changes, international trade behavior, and

foreign investors’ country of origin. The panel data allow us to observe the changes

in international trade performance after acquisition by foreign investors. To eliminate

the possible impact of general acquisitions, we use firms that have been acquired by

domestic investors in the same year as the control group. To address the possibility that

there was selection bias with foreign investors targeting domestic firms with higher