A Study On The Industry Hollowing Out Effect Of China's Outward Foreign Direct Investment

Since China puts forward the strategy of “going out”, the outward foreign direct investment(OFDI) expands dramatically. Meanwhile, the development of China's manufacturing industry shows seemingly “industry hollowing out” features. Whether China's rapid increasing OFDI will cause “industry hollowing out” effect is alarming. In fact, the foreign and domestic literatures on the relationship between OFDI and industry hollowing out have yield contradictory conclusions, few of which studies China's OFDI and industry hollowing out systematically. The further research on industry hollowing out effect of China's OFDI through qualitative and quantitative analysis methods has significant theoretical and practical implications.Based on the realistic background and literature studies, this paper firstly analyzes the theoretical basis of industry hollowing out effect of OFDI, reviews the classical theories on the relationship of OFDI and industry hollowing out, and explains the mechanisms how OFDI induces industry hollowing out, which are crowding out domestic investment, widening trade deficit and decreasing domestic manufacturing employment. Then, this paper introduces the current situation of China's OFDI and gives an overview on the development features of China's manufacturing which seems like industry hollowing out. Furthermore, the paper empirically analyzes the industry hollowing out effect of China's OFDI with the panel data of 23 provinces. Firstly, this part tests the existence of the industry hollowing out effect of China's OFDI. The paper builds an index system to measure the extent of industry hollowing out, calculates the industry hollowing out index(IHI) and applies panel data model to measure the correlation between OFDI and IHI. The result finds the sustained and rapid growing OFDI of eastern China will induce industry hollowing out. Secondly, this part tests the 3 mechanisms of OFDI's industry hollowing out effect and its regional differences with provincial panel data model. The result reveals that the eastern China's OFDI will induce industry hollowing out through domestic manufacturing investment crowding out effect, export substitution effect and employment substitution effect. At last, according to the main conclusions of theoretical and empirical analysis, some policy implications are brought out to prevent and control the industry hollowing out.