Developing inland China: The role of coastal foreign direct investment and exports

• DOI: http://doi.org/10.1111/twec.12527
• Author: Puman Ouyang,Shunli Yao
• Published date: 01 November 2017
• Date: 01 November 2017

ORIGINAL ARTICLE

Developing inland China: The role of coastal

foreign direct investment and exports*

Puman Ouyang

1

|

Shunli Yao

2

1

Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu,

Sichuan, China

2

Institute for Applied International Trade, Beijing, China

1

|

INTRODUCTION

It is a widespread pattern that foreign direct investment (FDI) tends to flow into the developed

regions in agglomeration within a host country. This happens in India (Nunnenkamp & Stracke,

2007), Indonesia (Blalock & Gertler, 2009), Lithuania (Javorcik, 2004; Sj€

oholm, 1999) and Russia

(Broadman & Recanatini, 2001). In a much larger scale, this also happens in China, a top FDI d es-

tination country with a vast territory and a high degree of regional divide.

China’s coastal regions have been the country’s front line to implement its open door policy in

the reform era. With 40% of total population and 30% of total land area, the coastal regions host

90% of the country’s FDI. Fuelled by the FDI inflow, the coastal regions also produce 90% of Chi-

na’s exports. This uneven development strategy has been justified, among others, by the belief that

the coastal economic boom would subsequently spread to the backward inland regions.

It is well understood that FDI and exports benefit local economies. But much less understood is

whether or not they will benefit other regions, as their positive spatial spillovers may be offset by

the negative impacts of their competition for talents and resources. As a special case for a general

pattern of FDI clustering in advanced regions in a host country, this paper makes an attempt to

study the impacts of China’s coastal economic activities, including FDI, on inland regions.

1

Foreign direct investment and exports helped achieve high growth rates for the Chinese econ-

omy during the 1990s and the 2000s. But the widening income disparity between the coastal and

inland regions has long been a concern for Chinese policymakers who are trying to steer the coun-

try towards a harmonious society. In the wake of global financial crisis, to rebalance the economy

by reducing its heavy reliance on foreign demand, as well as improving the efficiency and upgrad-

ing the quality of FDI and exports, has become a policy priority. The administration under Xi Jin-

ping and Li Keqiang is working on the blueprint for a new round of comprehensive reform.

*

Paper previously circulated as ARTNeT Working Paper No 138. The authors thank an anonymous referee for helpful com-

ments.

1

One needs to be cautious to use China as a special case for uneven FDI distribution between north and south in a global

economy. Unlike labour movement from backward regions to advanced regions within a country, which is a major mecha-

nism of inter-regional spillovers in a FDI host country as discussed in this paper, international labour movement from South

to North is highly restricted.

DOI: 10.1111/twec.12527

World Econ. 2017;40:2403–2423. wileyonlinelibrary.com/journal/twec ©2017 John Wiley & Sons Ltd

|

2403

Against this backdrop, it is tempting to ask: for China’s coastal FDI and exports, do they really

contribute to the inland development through positive spatial spillovers large enough to offset the

competition effects?

The existing studies mainly estimate the overall inter-regional impacts of either coastal FDI or

export (Fu, 2004; Ouyang & Fu, 2012). Unlike them, we estimate the spatial impacts of both of

the coastal FDI and export on inland economies, with a special focus on the heterogeneous impacts

generated by different modes of FDI and export, for example FDI by type of local partnership and

export by ownership of trading companies. We do so because of two reasons: (i) coastal FDI

and export are not the same thing and must be controlled in estimations; (ii) different types of FDI

and exports interact with the inland economy through different mechanisms and could generate

very different spatial impacts.

Given the coexistence of both positive spillover effects and negative competition effects on the

inland generated by coastal investment and export, it is difficult in theory to predict the net

impacts. Nevertheless, the stylised features of the Chinese foreign trade and investment regimes

can help us speculate possible outcomes of our empirical investigation of the issue. First of all,

bulk of the Chinese export constitutes processing export with low domestic value added. This

implies that true Chinese export activities are not as intensive as the export volume suggests and

that domestic spillovers of production technology and management know-how could be limited.

Second, there are mainly three partnership types of FDI in China. As far as intellectual property

rights protection is concerned, the wholly foreign-funded enterprises (WFFEs) are the best form of

overseas investment. China’s technology-for-market policy requires high-tech foreign investors

seeking access to Chinese market to form equity joint ventures (EJVs) with domestic firms, mostly

state-owned enterprises (SOEs). In-between are the cooperative joint ventures (CJVs). EJVs make

possible maximum transfer of production technology and management know-how from foreign

investors to local partners. However, China’s high-tech sectors are dominated by monopolistic

SOEs. So the Chinese partners in high-tech EJVs are mostly SOEs. They benefit from foreign part-

ners’transfer of technology and know-how, but also have an interest and ability to protect them

from leaking to other firms, including firms in other regions, and to shelter themselves from com-

petition. Therefore, EJVs may not do better than other forms of foreign investment when it comes

to generating spillovers.

2

The paper develops a theory-based econometric model to estimate the spatial impacts of both

overall and specific coastal FDI and exports. It applies panel estimation models to Chinese provin-

cial-level data for the years 1993–2008, a period that begins 1 year after Deng Xiaoping’s south tour

and ends with the outbreak of global financial crisis. This is also a period that covers the whole pro-

cess of China’s WTO accession and witnesses fast growth of Chinese inward FDI and export.

We find that the coastal FDI has overall positive inter-regional impacts, while the coastal export

does not. Among different modes of FDI and export, CJVs generate positive impacts, but the

WFFE effects are little and even negative for EJVs. This is because CJVs cannot prevent technol-

ogy from leaking to other regions, but WFFE and SOEs in EJVs have the ability to do so. Also,

the inter-regional impacts do not exhibit any significance and robustness across exporters’owner-

ship status.

The remaining part of the paper is organised as follows. Section 2 backgrounds the research

questions and explains the potential mechanisms through which the coastal FDI and export interact

with the inland economies, as well as the characteristics of specific forms of FDI and export and

the potential magnitudes of their inter-regional spillovers. Section 3 specifies a theory-based

2

More detailed discussions on specific forms of FDI and export are given in Section 2.3.

2404

|

OUYANG AND YAO