Chengang Wang

Causal links between foreign direct investment and trade in China

Abstract This paper examines the causal relationship between foreign direct investment (FDI) and trade (exports and imports) in China. The empirical study is based on a panel of bilateral data for China and 19 home countries/regions over the period 1984–1998. Econometric techniques for panel data are applied to test unit roots and causality. The results indicate a virtuous procedure of development for China: the growth of Chinas imports causes the growth in inward FDI from a home country/region, which, in turn, causes the growth of exports from China to the home country/region. The growth of exports causes the growth of imports. The results have important policy implications.

Determinants of Bilateral Trade Flows in OECD Countries: Evidence from Gravity Panel Data Models

This paper aims to identify the main causes of bilateral trade flows in OECD countries. The specific features of the study include the explicit introduction of R&D and FDI as the two important explanatory variables, conduct of unit root tests in the panel data framework and careful consideration of endogeneity. The main findings are that the levels and similarities of market size, domestic R&D stock and inward FDI stock are positively related to bilateral trade, while the distance, measured by both geographical distance and relative factor endowment, between trade partner countries has a negative impact. These findings lend support to new trade, FDI and new growth theories.

Testing the Regional Performance of Multinational Enterprises in the Retail Sector: The Moderating Effects of Timing, Speed and Experience

Drawing on regional strategy theory we complement the core effect of firm-specific advantages on the performance of multinational enterprises with an analysis of the performance consequences of home region concentration on firm performance. We also develop hypotheses regarding the effect of foreign entry timing, internationalization speed and international experience on the performance effect of home region concentration. We test our hypotheses against unique longitudinal data from a panel of 128 multinational enterprises in the retail sector whose geographical spread of international activities we traced between 1995 and 2010. Our findings support the predictions of regional strategy theory and highlight the importance of foreign entry timing and internationalization speed in strengthening the positive effect of home region concentration on the performance of multinational enterprises.

Understanding China's international economic integration

China has been changing fast socially, economically and politically since opening up to the world economy in 1978. With the liberalisation of dysfunctional systems of central planning, state ownership, government regulations and trade and foreign investment rules and reforms in agriculture, industry, and the financial, banking and service sectors, China has performed exceptionally well by most standards. China has maintained its position amongst the fast growing economies in the world during the past three decades. On a purchasing power parity (PPP) basis, it is the world’s second largest economy after the United States (Zhang and Liu 2009). Equally significant is the increased importance of China’s trade and FDI, China has become number one in the developing world for its exports and inward investment (Zhang and Liu 2009). China is a leading producer/exporter of many industrial products, including textiles, clothing, steel, coal, electrical and electronic goods, and pharmaceuticals. China also seems to have so far successfully weathered significant economic and political difficulties, including various episodes of overheating at different times, the Asian Financial Crisis of the late 1990s and the latest economic crisis. Despite the fact that its economy virtually stalled in late 2008, China bounced back with some impressive records. Recently published figures show China’s GDP grew by 7.9% in 2009 to the second quarter, fixed investment grew by 35%, car sales by 48% and home purchases by more than 80% (The Economist, 18 July 2009). What has contributed to this development? A large volume of books, articles and reports has been produced to shed light on this question. A general consensus is that international economic integration into the world economy through openness to trade and FDI is a key factor in bringing China its success. In a country where exposure to the world economy was associated with the shadow of humiliation, and self-reliance was considered a virtue, openness, or ‘Kai Fang’ as the Chinese say, was initially embarked upon with caution (Shenkar 2005). There wasn’t a ‘well-designed blueprint’ and ‘muddling through experiments’ seemed to be the Chinese

Productivity spillovers from foreign direct investment in Chinese industries

This paper investigates productivity spillover effects of FDI and relates it to the capital- or labour-intensive nature of the industry. Using a panel data set of 35 industries in China, it shows that the presence and magnitude of FDI spillover effects vary by different channels and the nature of the industry. On average, FDI has no horizontal spillover effects but has positive backward linkage effects. However, there are substantial differences in FDI spillover effects via demonstration, competition and labour mobility between capital- and labour-intensive industries. The findings have important policy implications.

Knowledge spillovers, absorptive capacity and total factor productivity in China’s manufacturing firms

Applying the stochastic frontier framework, this study explores the diffusion and absorption of technological knowledge in China’s manufacturing firms, based on a panel of more than 10,000 local and foreign-invested firms over the period 1998–2001. Our empirical approach allows us to distinguish between technological progress (TP) and technical efficiency (TE) in analysing whether R&D, exports and the presence of foreign direct investment simultaneously enhance TP through knowledge spillovers in a single framework and whether different types of domestic absorptive capacity moderate external knowledge spillovers in relation to TE. The results show that there are positive inter-industry productivity spillovers from R&D and foreign presence, whereas evidence of intra-industry productivity spillovers from FDI to Chinese firms is less robust. We find evidence that absorptive capacity is one of the key determinants to quantitatively explain intra-industry differences in productivity of local Chinese firms. The findings have important policy implications.

Local sourcing of multinational enterprises in China

Purpose – Local sourcing from indigenous firms by multinational enterprises (MNEs) is an important channel through which the former may benefit from the positive externalities generated by the latter. The purpose of this study is to analyze the extent and determinants of local sourcing of MNEs.Design/methodology/approach – Employing a survey dataset covering 493 multinational subsidiaries in China during 1999‐2005, this paper applies the two‐limit Tobit model.Findings – It is found that an MNEs local sourcing decision is influenced by its strategies, characteristics such as size and learning ability and country‐of‐origin. More specifically, export‐orientation strategy, joint venture strategy and networking with local suppliers positively affect local sourcing. Small and autonomous subsidiaries tend to source more locally. Age has a non‐linear effect. The importance of these determinants varies with regions.Research limitations/implications – Aiming at capacity building and competitiveness of indigenous f...

R&D capabilities, intellectual property strength and choice of equity ownership in cross-border acquisitions: evidence from BRICS acquirers in Europe

The aim of the study is to investigate two relatively underexplored factors, namely, the R&D (research and development) capabilities of target firms and the strength of intellectual property (IP) institutions in target economies, that influences the choice of equity ownership in cross border acquisitions (CBAs) undertaken by multinational enterprises (MNEs) from BRICS (Brazil, Russia, India, China and South Africa) economies. They developed the key hypothesis on foreign market entry through CBAs by incorporating insights from transaction costs economics, the resource-based view and institutional theory to investigate the determinants of full versus partial equity ownership. Using logistic regression estimation methods to a sample of 111 CBA deals of BRICS MNEs in 22 European countries, it was found that BRICS MNEs were likely to pursue full rather than partial acquisition mode when target firms have high R&D capabilities. However, the greater the degree of strength of IP institutions in target economies and higher the target firms’ R&D capabilities, the more likely it is for BRICS MNEs to undertake partial, rather than, full acquisition mode. They provided interesting theoretical insights and managerial implications that might underlie some of the key findings on CBAs by emerging market MNEs.

Dynamic marketing capabilities, foreign ownership modes, sub-national locations and the performance of foreign affiliates in developing economies

Purpose The purpose of this paper is to examine the role of dynamic marketing capabilities (DMC), foreign ownership modes and sub-national locations on the performance of foreign-owned affiliates (FOAs) in developing economies. Design/methodology/approach Based on a sample of 254 FOAs in the Indian manufacturing sector (covering the period of 2000-2008 leading to 623 firm-year observations), the empirical paper adopts the panel data regression approach. Findings The study confirms the significant importance of DMC to assist FOAs to gain better sales performance in an emerging market such as India. The findings indicate that wholly owned foreign affiliates (WOFAs) have better sales performance than international joint ventures (IJVs), and majority-owned international joint ventures (MAIJVs) perform better than minority-owned international joint ventures in the Indian manufacturing sector. The results confirm that effective deployment of DMC leads to better sales performance in WOFAs and to some extent in MAIJVs. Perhaps the most interesting finding is that developing DMC in non-metropolitan areas is associated with higher sales growth than in metropolitan locations. Originality/value The study contributes to the literature by examining the impact of DMC on performance of FOA by considering the organised manufacturing sector in a large and fast growing developing economy. In addition, the results for the moderating effects provide novel evidence of the conditions under which DMC of FOA interact with different ownership modes and influence firm performance.

Trade Orientation and Mutual Productivity Spillovers between Foreign and Local Firms in China

This paper argues that multinational firms can benefit from indigenous knowledge diffusion in a host developing country so that there can be two‐way productivity spillovers between foreign and local firms even in the developing world. This new argument is confirmed by a very large firm‐level data set from the Chinese manufacturing sector. After grouping firms based on their trade orientation, we find that foreign firms have a positive impact on local‐market‐oriented Chinese firms. When the degree of foreign presence is sufficiently high, there will be negative productivity effects on export‐oriented Chinese firms. On the other hand, local Chinese firms have a positive impact on export‐oriented foreign invested firms. After dividing foreign firms according to their sources, we find that the beneficial spillovers between OECD and local Chinese firms are much greater than those between Hong Kong/Macao/Taiwan and local Chinese firms.