The Impact of Foreign Direct Investment on the Productivity of China's Automotive Industry

Article excerpt

Abstract and Key Results

* This study contributes to the existing literature by empirically investigating the effect of FDI inflows on the aggregate labour productivity of China's automotive industry.

* A production function model is developed using a panel data set at sub-sector level. Two statistical models: pooled ordinary least squares model (POLS) and fixed effects model (FES) were used to estimate the influence of foreign direct investment on aggregate labour productivity in the industry.

* Inward FDI plays a positive role in increasing industrial productivity, implying that the government should continue to encourage inward investment. However the results also suggest that efforts to increase capital intensity and average firm size in the industry will also improve labour productivity.

Key Words

Foreign Direct Investment, Automotive Industry, China

Introduction

There is increasing interest in the impact of foreign direct investment (FDI) on host country productivity. However, contradictory empirical results have been obtained from a number of previous studies. Kokko et al. (1994, 1996), Egger and Pfaffermayr (2001), Blomstrom and Persson (1983), and Bertschek (1995), for example, found evidence of a significant positive effect of FDI on spillovers. Haddad and Harrison (1993), Girma et al. (2001), Kholdy (1995), Globerman (1979), and Veugelers and Houte (1990), however, found insignificant, or negative impacts in their empirical results. Interestingly, Aitken and Harrison (1999), Zukowska-Gagelmann (2000), and Djankov and Hoekman (2000) obtained a complicated pattern of mixed results in their respective studies. This paper adds to this important field of research by examining the impact of FDI on China's automotive industrial productivity using a panel data set.

The automotive industry is chosen for several reasons. First, the automotive industry is one of the six key industries (1) in China. It has expanded rapidly over the reform years and typically accounts for a large and increasing share of industrial production, output, exports, and employment. In 1999, total sales of China's autoindustry were about US$38 billion, accounting for nearly 4 percent of the country's GDP. In 1998, seven million employees worked in the auto-industry, accounting for 3.3 percent of the total Chinese urban workforce (Harwit 2001). The automotive industry, particularly in industrialised countries, is a focus of attention due to its major contribution to GDP and employment (Irandoust 1999). Historically, in the USA, Japan, and South Korea, automotive exports have been an important element of foreign trade. Further, the development of China's automotive industry has been driven by both domestic policy and foreign economic participation. Through studying this sector it is possible to investigate issues both of industrialisation in general, and the impact of technology transfer in particular (Harwit 1995). It is also important to note that there has been a significant amount of FDI in the Chinese automotive industry. By the end of 2000, the cumulative "actually used" FDI (2) in the automotive industry reached US$45.4 billion; accounting for 13 percent of total realised FDI in China. Moreover, China is also one of the largest automobile markets in the world and has become the most important destination for FDI by automobile multinational enterprises (MNEs), especially since China's entry into the World Trade Organisation (WTO).

WTO entry, however, has forced China's automotive industry to face fierce international competition. As Sit and Liu (2000) point out, China's entry into the WTO has two effects on China's automotive industry: one is the gradual reduction of tariffs on imported automobiles and components and the other is the further opening of the industry to FDI. With increasing inflows of FDI into the industry, it is essential to improve our understanding of the effects of FDI on the productivity of the industry. …