How does foreign direct investment affect industrial competitiveness? Evidence from China

Industrial competitiveness (IC) is a country's ability to produce and export manufactured goods competitively. How does foreign direct investment (FDI) affect IC in China? The significance of the topic, besides the intrinsic importance of IC, is heightened by outstanding performance of the Chinese industry and massive increase in FDI flows into China in the past decade. Yet empirical studies on the issue in the literature have been limited. This article attempts to close the gap by estimating the role of FDI with a large panel data of 21 manufacturing sectors for 31 regions in six years (2005–2010). We construct, following the method of UNIDO (2002), the IC index to measure multidimensional industrial performance. Several empirical specifications are developed for IC level and IC growth with both panel and cross-section data. Results suggest that FDI has large positive effects on China's industrial performance; such effects are much greater on low-tech manufacturing than medium- and high-tech industries, and the contribution is enhanced by FDI's interaction with local human capital. The role of FDI increases with FDI inflows over the period, and changes in FDI affect changes in industrial performance.