The Impact of Outward Foreign Direct Investment on Product Quality and Export: Evidence from China

Abstract

While China’s outward foreign direct investment (OFDI) is growing rapidly, few studies have considered the impact of this growth on product quality. This study uses microdata at the enterprise level to investigate the effects of OFDI on product quality and export trade, from the perspective of enterprise heterogeneity. The results denote that (1) OFDI improves product quality, which is caused by the direct promotional effect of OFDI and the productivity effect brought by OFDI. (2) As OFDI of low productivity enterprises creates a productivity effect and leads to a promotional effect on product quality enhancement, the magnitude is significantly higher than that of high productivity enterprises. (3) Product quality enhancement significantly increases the promotional effect on exports induced by OFDI of low productivity enterprises, while simultaneously significantly suppressing the promotional effect on exports induced by OFDI of high productivity enterprises. (4) The promotional effect of OFDI on exports decreases as productivity increases, and OFDI significantly promotes exports of low productivity enterprises and has no significant effect on high productivity enterprises. These results suggest that China should continue to expand the space for international cooperation and encourage enterprises to invest overseas, especially those facing export pressures.