Potential impacts of foreign divestment on China’s high-tech manufacturing industry: a general equilibrium model-based analysis

Abstract

ABSTRACT This paper evaluates the potential impacts of foreign divestment on the growth of China’s High-tech Manufacturing industry by developing a dynamic computable general equilibrium (CGE) model that features foreign direct investment (FDI). Simulation results show that when FDI inflow stops, domestic firms substitute foreign firms rapidly, stimulating output relative to the baseline scenario. However, when foreign divestment is continuous or drastic, there are sizable adverse impacts on domestic firms’ output with the decreasing labour productivity relative to the baseline. The further decomposition of labour productivity growth suggests that larger foreign divestment results in a more substantial reduction in technological catch-up and technological change, implying the crucial role of FDI-related technology transfer and spillover in the growth of China’s high-tech manufacturing industry.