Impact of China's Outward Foreign Direct Investment on Its Regional Economic Growth

• Date: 01 May 2018
• Author: Chunlai Chen
• Published date: 01 May 2018
• DOI: http://doi.org/10.1111/cwe.12240

©2018 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–21, Vol. 26, No. 3, 2018 1

*Chunlai Chen, Associate Professor, Crawford School of Public Policy, The Australian National University,

Australia. Email: chunlai.chen@anu.edu.au.

Impact of China’s Outward Foreign Direct Investment

on Its Regional Economic Growth

Chunlai Chen*

Abstract

This paper investigates the impact of China’s outward foreign direct investment (OFDI)

on its economic growth. By using a provincial-level panel dataset and applying fixed-

effects and instrumental variable regression techniques, the study nds that both OFDI

from provincial rms and OFDI from state-owned enterprises have a positive impact on

China’s provincial economic growth. The positive impact of OFDI on provincial economic

growth may be the result of reverse knowledge spillovers from OFDI to the home

provincial economy through demonstration and imitation, labor movement, and backward

and forward industrial linkages, thus increasing the productivity and the efficiency of

home rms and promoting the growth of the home economy.

Key words: economic growth, fixed effects and instrumental variables, knowledge

spillovers, outward foreign direct investment

JEL codes: F21, F62, O40, R11

I. Introduction

Since China launched the “go global” strategy in 2001, outward foreign direct

investment (OFDI) from China has increased dramatically. In 2015, OFDI ows from

China reached US$146bn, while the stock of Chinese OFDI in the world was worth

US$1.1tn (MOC, 2015). Chinese multinational enterprises (MNEs) undertaking

OFDI can be categorized into two groups: central government-controlled state-owned

enterprises (SOEs) and provincial rms (most of them are private rms). OFDI ows

from China had been dominated by the SOEs. However, OFDI ows from provincial

firms have increased rapidly since 2010 and have surpassed OFDI flows from SOEs

since 2014 (MOC, 2015). The motives for Chinese MNEs to conduct OFDI are diverse.

Apart from market-seeking, efciency-seeking and resource-seeking motives, one of the

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Chunlai Chen / 1–21, Vol. 26, No. 3, 2018

©2018 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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main motives of Chinese MNEs is strategic asset-seeking, aiming to acquire advanced

technology, production know-how, modern management skills and international famous

brands (e.g. Buckley et al., 2007; Liu and Scott-Kennel, 2011).

There is a growing body of studies on China’s OFDI. However, previous studies on

China’s OFDI have mainly focused on investigating either the motivations of Chinese

MNEs to conduct OFDI or the location determinants of host countries to attract China’s

OFDI (e.g. Liu et al., 2005; Buckley et al., 2007; Cheung and Qian, 2009; Wei and Alon,

2010; Huang and Wang, 2011; Zhang and Daly, 2011; Cheung et al., 2012; Kolstad and

Wiig, 2012; Chen, 2015a; Yao et al., 2017). Empirical studies on the impact of OFDI on

China’s economy have been very limited and empirical studies on the impact of reverse

knowledge spillovers of OFDI on China’s economic growth are rare.

This paper attempts to fill the gap in the literature and investigate the impact of

reverse knowledge spillovers of OFDI on China’s economic growth. Specically, this

paper aims to use Chinese provincial-level data to test whether there are impacts of

reverse knowledge spillovers of OFDI on provincial economic growth and to investigate

the impacts of reverse knowledge spillovers of OFDI from provincial rms and from

SOEs on provincial economic growth.

The study nds that on aggregate OFDI has a positive impact on China’s provincial

economic growth through reverse knowledge spillovers to home province economies.

By separating OFDI from provincial firms and from SOEs, the study finds that both

OFDI from provincial firms and from SOEs have generated positive knowledge

spillovers to the home economy, thus contributing to provincial economic growth.

The paper is structured as follows. The next section discusses the theories and

channels of reverse knowledge spillovers from OFDI and provides a review of the

literature. Section III presents the framework of analysis and the empirical model.

Section IV describes the data, species the variables and discusses econometric issues.

Section V conducts the regression and explains the estimation results. Finally, Section VI

presents the conclusion and policy implications.

II. Reverse Knowledge Spillovers of Outward Foreign

Direct Investment: Theory and Literature

Knowledge spillovers refer to knowledge ow that takes place without any business

transactions occurring (Griliches, 1992). Foreign direct investment (FDI) is one of

the most important means through which international knowledge spillovers take

place (e.g. D unning, 1993). According to the theoretical literature (e.g. Hymer, 1976;

Dunning, 1993), through demonstration effects, labor movement, information ows and

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