Essays on Foreign Direct Investment in China

Abstract

China has experienced high inward foreign direct investment (IFDI) and outward foreign direct investment (OFDI) flows over the past three decades since it implemented the 1979 equity joint venture law in the late 1970s and the Go Abroad policy in the early 2000s. As a result of these two forms of investment, China has experienced dramatic changes in its economy. This thesis aims to explore China’s FDI (Foreign Direct Investment) from a firm, sector and regional perspective. This thesis includes three empirical studies and is a sector-level analysis focused on investigating the home-country sectorial determinants that impact OFDI relative to IFDI in China. In this study, I explore the extent to which the interplay of the home country's push factors, such as market size, capital, import, technology, export, real effective exchange rate, and labour productivity, has enabled China to transition from a predominantly host country to a home country for Chinese MNE and eventually to a more advanced stage of economic development. The findings of this study indicate that capital, import, export, and real effective exchange rate have a positive impact on the increased share of OFDI relative to IFDI. The findings also show that market size proxied by sector-level GDP per capita has a negative and significant effect. The second empirical study evaluates the effect of leverage on the internationalisation of Chinese firms from 2009 to 2017. I adopt a novel estimation method using a linear probability model with high dimensional fixed effects on data comprising 200,000 firm-year observations obtained from the ORBIS database. The findings indicate that leverage proxied by debt to asset, debt to capital and long-term debt to asset has a negative impact on the probability of Chinese firms pursuing international investment opportunities. The third empirical study investigates the effect of regional IFDI on regional house prices in 31 provinces in China from 2006 to 2019. This study adopts a novel approach using a panel quantile estimation with non-additive fixed effects. The results indicate that IFDI has a positive and significant impact on the majority of the quantile estimations. Furthermore, the findings show that IFDI has more influence on low house prices than high house-priced provinces in China. Additionally, the results show that income, land cost, and human capital have a positive effect across most of the quantiles in the house price distribution. In contrast, house supply, unemployment, and pollution have a negative impact.