Decomposition of Extensive and Intensive Trade Margin Impacts of Chinas Agricultural OFDI

Abstract

Economic theory indicates that some ambiguity in the relationship between outward foreign direct investment (OFDI)and trade. This paper estimate the impact of OFDI on the extensive and intensive agricultural import margins of at HS 6-digit commodity level over the sample period from 2012-2020 with the top ten trade partners. We find that standard gravity variables provide good explanatory power for bilateral trade on extensive margin. The empirical results show that the scale of OFDI has a positive impact on the total imports of agricultural products by diversifying product varieties rather than increasing the price of agricultural products, i.e. the impact of OFDI is concentrated exclusively on the extensive margin of China agricultural imports rather than intensive margin. Importantly, based on specific categories of agricultural products, our results suggest that OFDI almost works on food processing and animal products. Additionally, in order to further investigate the motivation of China`s agricultural OFDI, we construct expanded gravity model. The empirical results show that agricultural-related OFDI exhibits characteristics of seeking labor-intensive factors. Overall, our results support that OFDI promotes the diversification of China`s agricultural imports and contributes to the improvement of the welfare of Chinese residents.