The determinants and consequences of FDI: evidence from Chinese manufacturing firms

Using a very comprehensive Chinese firm-level data covering the period of 2000 to 2005, this thesis empirically assesses the determinants and consequences of Foreign Direct Investment (FDI) in China. In particular, the novelty of this research lies in our firm-level analysis which is based on a large sample of firms in 31 host provinces, allowing us to explore the question by distinguishing different modes of FDI inflows. We employ binary-choice models to estimate how institutional quality and pre-acquisition firm heterogeneity affect the probabilities of domestic firms being acquired by foreign investors. We find better institution quality encourages FDI and this effect is stronger in capital-intensive and R&D intensive industries. Moreover, in capital-intensive industries, better institutions reduce the probability of domestic firms being wholly acquired. We also find evidence of 'cherry-picking' which is stronger in capital- and R&D- intensive industries. We then apply a combination of propensity-score matching and difference-in-difference estimation to assess the effect of foreign acquisition on acquired firms with a focus on export performance, productivity and financial indicators. We find significant FDI-induced export lift and finance improvement. However, FDI-induced productivity change is not significant. Finally, we investigate whether location determinants have different effects on attracting greenfield FDI as compared to acquisition FDI. We find the industry cluster pushes greenfield FDI away due to competition effect while attracting acquisition FDI, indicating that procurement opportunities have a strong impact on acquisition FDI