How Does Foreign Direct Investment Affect China's Division of Labor in National Value Chain?

Abstract

The history of economic development shows that late movers, especially developing countries with broad domestic market space, can fully promote domestic division of labor to advance economic development. China, the biggest developing country, has rich natural resources and broad domestic market. More importantly, there are significant differences in inter-regional development modes and development levels, being good for the development of domestic specialized division of labor. However, it is the major experience, arising from China's rapid economic growth since the reform and opening-up, namely to make the best use of cost advantages and preferential policies, and enthusiastically participate in global value chain so as to improve resource allocation efficiency and promote domestic industrial upgrading. Thus, it leads to an important proposition worthy of discussion, namely as for the development of big countries, how their embeddedness in global value chain affects their domestic specialized division of labor, and especially how constant foreign direct investment affects the construction of China's national value chain.This paper decomposes the regional value added in division of labor in national value chain and establishes a quantitative analysis framework of division of labor in national value chain. Through the matching between Chinese inter-provincial input-output tables and China customs database, we analyze the effect of FDI on division of labor in national value chain through an empirical model based on consideration of the differences of FDI orientation.This paper arrives at the results as follows:firstly, FDI and its market-oriented behavior hinder the construction of national value chain, and the MA secondly, as for the heterogeneity of the effect of FDI on division of labor in national value chain, more coastal areas are incorporated in division of labor in global value chain dominated by MNCs, and their national value chain embeddedness is lower; similarly, FDI has produced a greater substitution effect in the electromechanical manufacturing departments with higher technical complexity and more roundabout production which have relatively lower division of labor in national value chain; thirdly, inflow and M&A of FDI have taken more impacts on the upstream link of national value chain, and cut off domestic forward linkage of its advanced technology, marketing channels, intermediate output and other forms to a large extent.This paper provides useful implications and policy suggestions as follows:firstly, the goal orientation of the use of foreign capital should be further adjusted. Besides focusing on the scale of FDI, product value added, employment proportion, etc., we should pay more attention to structural indexes. It means that we should place more emphasis on the national risks resulting from foreign investment.Secondly, more attention should be paid to the growth of Chinese-funded enterprises, especially private-owned enterprises. More financing channels and investment opportunities should be given to private-owned enterprises by perfecting the market mechanism, creating fair competition environment, strengthening public services and formulating proper preferential policies.Thirdly, more attention should be paid to optimal allocation of domestic resources, the recombination of resource factors should be quickened, and domestic specialized division of labor should be coordinated.Fourthly, more attention should be paid to the cultivation of domestic market and the concepts of emphasizing export but ignoring domestic and fragmented should be changed thoroughly. All kinds of specialized markets where domestic sales and foreign trade are well-combined and the platform economy which faces domestic market and integrates the production and circulation links of raw material supply should be vigorously developed, so as to promote the formation and development of unified domestic market.The contribution of this paper lies in that:firstly, this paper establishes a quantitative analysis framework of national value chain based on inter-provincial input-output, to portray national value chain embeddedness of industrial sectors at provincial level. Secondly, we build an econometric model taking FDI orientation and differences in value chain links of FDI into account, analyze the influence of FDI on China's national value chain embeddedness by using the provincial industry data. Thirdly, through the matching between Chinese inter-provincial input-output tables and China customs database, we describe FDI at the provincial level in detail.