Does foreign direct investment promote exports in China?

Abstract

Purpose

The purpose of this paper is to investigate the causal link between foreign direct investment (FDI) and exports in China based on the knowledge capital model (KK model, Markusen, 2002).

Design/methodology/approach

The bootstrap Granger full-sample and sub-sample rolling window causality test is used to determine whether FDI can promote exports.

Findings

The full-sample causality test indicates no causal relationship from FDI to exports. However, considering structural changes of exports and FDI, the authors’ find that the full-sample test is not reliable. Instead, the authors use the rolling window causality test to revisit the dynamic causal relationship, and the results present significant effects from FDI on exports, mostly around periods in which the proportion of FDI from Hong Kong, Macao and Taiwan is increasing. Specifically, positive impacts of FDI on exports are stronger than the negative impacts in China.

Research limitations/implications

The findings in this study suggest a significant time-varying nature of the correlation between FDI and exports. The promotion effect of FDI to exports is proved by the rolling window approach; it thus supports the KK model that divides FDI into lateral FDI and vertical FDI and proves that the constitution of FDI is critical to the relationship between FDI and exports.

Practical implications

China has been facing adjustment of its economic structure in recent years, and in this situation, increasing the proportion of FDI that can bring advanced production function is critical for the industrial structural adjustment.

Originality/value

This paper uses the bootstrap rolling window causality test to investigate the time-varying nature of the causality between FDI and exports, considering structural changes for the first time. The authors further deepen the previous research and draw a more realistic conclusion.

Citation

Li, X., Chang, H.L., Su, C.W. and Dai, Y. (2017), "Does foreign direct investment promote exports in China?", China Finance Review International, Vol. 7 No. 2, pp. 185-202. https://doi.org/10.1108/CFRI-04-2016-0026