Are FDI in China and Parent Firm Exports Substitutes or Complements?-An Empirical Study of Taiwanese Manufacturing Firms

Abstract

In recent years, an increasing number of Taiwanese firms have invested overseas and the foreign direct investment (FDI) has gone predominately to China. With growing importance of operations in China, it is essential to understand how FDI in China affects operation of the parent firms and their mode of serving foreign markets. This paper addresses this issue by empirically investigating whether FDI in China displaces or promotes parent firms' exports. By using a unique firm-level data set that links approved investment projects and realized amount of FDI in China to financial statements and exports data of firms listed on Taiwan Stock Exchange from 1992 to 2006, a period of sharp increase in FDI in China, we are able to examine whether FDI in China substitutes or complements exports from home. We adopt three alternative empirical models: panel regressions with fixed effects, a panel Tobit model and a dynamic panel model. We find that FDI in China reduces parent firms' exports, suggesting a substitutive relationship. Interestingly enough, the effect pertains to firms in both non-electronics industries and the electronics industry - which is characterized by dense production networks and surging investment in China in recent years. The results are robust to choice of empirical models.