Dynamic interaction between outward foreign direct investment and home country industrial upgrading: Regional differences in China

Abstract

AbstractThis study examines the dynamic interaction between outward foreign direct investment (OFDI) and home industrial upgrading in China by using a panel vector autoregressive model over the period 2004–2017. To investigate regional differences, the 30 Chinese provinces were divided into 3 regions. To investigate regional differences, 30 Chinese provinces were divided into region 1, region 2, and 3 regions, which represent economically developed regions, comparatively economically developed regions, and economically less developed regions. The empirical results show that OFDI significantly promotes industrial upgrading across the whole sample, while the reverse is not significant. Further, considering the heterogeneity of regional economic development levels, the results show that the OFDI from region 1 and industrial upgrading promote each other, while the opposite is true for region 3. In region 2, industrial upgrading has an incentive effect on OFDI, but not significantly affected by OFDI. In addition, to supplement our analysis, impulse response function and variance decomposition are used to demonstrate the interaction process between OFDI and industrial upgrading of the home country. Therefore, to achieve industrial upgrading, Chinese governments should adhere to the long‐term national policy of “going global,” enhance the strength of OFDI, and formulate development strategies according to local conditions.