Firm’s outward foreign direct investment and efficiency loss of factor price distortion: Evidence from Chinese firms

Abstract

This paper investigates whether China’s outward foreign direct investment (OFDI) can solve the problem of low productivity caused by factor price distortions and the marketization of China’s factor market. For this analysis industrial enterprise data, covering a period of 5 years from 2003 to 2007, is used. To reveal the relationship between efficiency loss caused by factor price distortion and OFDI the trend score matching method is applied. The results of the analysis are threefold. First of all, the price distortion of elements inhibits the increase of total factor productivity, and labor price or capital price distortion has a significant negative impact on firm productivity. Second, foreign direct investments can mitigate the negative impact of factor price distortions on total factor productivity. Finally, from the perspective of different investment liberalization, there is a heterogeneous impact on the relationship between foreign direct investments and factor price distortions affecting the total factor productivity of enterprises.