Abstract
China’s automotive industry has developed dramatically in recent years as more and more major multinational corporations (MNCs) in this industry began to invest in China. Most of these investments have developed in the form of joint-ventures with Chinese state owned enterprises (SOEs). This paper contributes to the current literature by studying the effect of foreign direct investment (FDI) on the productivity of the automotive industry in China using panel data during the 1999 –2008 period. Channels through which FDI may directly and indirectly affect the productivity are investigated using pooled ordinary least squares model (POLS) and fixed effects model (FES) to estimate the influence of FDI on productivity in the automotive industry. The results suggest that FDI plays a negative role in this industry and suggests that there is a need for Chinese government to modify its policies and practices in order to improve the productivity of such a key industry in the Chinese economy.
Highlights
Automobile industry has been the main driver of the intensification of technological changes in the 19th century (Womack, Jones, and Roos, 1990)
The fixed effects model (FES) model is preferred to the pooled ordinary least squares model (POLS) model because of its large and significant Likelihood ratio (LR)-value
The results suggest that the domestic capital has a negative impact on the productivity in the industry indicating the existence of capital imperfection in the industry and suggesting that the government should treat SOEs and small and medium size enterprises (SMEs) indifferently to improve their comparative advantages in order to compete in the domestic market, and in international markets
Summary
Automobile industry has been the main driver of the intensification of technological changes in the 19th century (Womack, Jones, and Roos, 1990). The coefficient for Ln (G) is positive and statistically significant at the 5 % level, showing that the absorptive capability positively affects productivity in China's automotive industry and that domestic human capital plays a role in capturing the benefits from FDI. The coefficient for Ln (E) is positive and statistically significant at the 1 % level, demonstrating that economy of scale positively affects productivity in China's automotive industry This is an important finding and contribution to the emerging markets literature. Our results contradict the FDI theories that suggest FDI has a positive impact on the host country’s industrial productivity through both direct and indirect effects This may be related to the competition effect and the unwillingness of core technology transfer. The results suggest that the domestic capital has a negative impact on the productivity in the industry indicating the existence of capital imperfection in the industry and suggesting that the government should treat SOEs and SMEs indifferently to improve their comparative advantages in order to compete in the domestic market, and in international markets
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