General-Equilibrium Approach To China's Outward FDI

According to recent facts and theoretical development, this thesis uses the general-equilibrium framework to analyze the rationale for China's outward FDI. There are totally seven chapters. Chapter 1 introduction and chapter 2 theory reviews, which overviews the development of general-equilibrium approaches to FDI and researches on motivations behind China's outward FDI. Chapter 3 and chapter 4 develop a simple general-equilibrium model and conduct numerical simulation, based on monopolistic competitive and oligopolistic models respectively, in order to explain the emergence of endogenous multinational corporations headquartered in the labor-abundant countries such as China. Chapter 5 highlights some empirical facts on China's outward FDI and tries to interpret them in the former founded general-equilbirium model. Chapter 6 simulates the effects of typical policies of domestic country on its MNEs'overseas sales and welfare, by introducing the role of government, and chapter 7 concludes.Chapter 2 reviews the development of general-equilibrium approaches to FDI and related works on the rationale behind China's outward FDI. Early general-equilibrium models of FDI didn't differentiate between direct investment and portfolio investment, treating FDI as some homogenous factor's transnational flow and forecasting it would flow from where it is abundant to where it is scarce. Caves(1971) argued that FDI is associated with industry-specific capital and found FDI would flow from a high-reward country to a low-reward country within the same industry, based on a model consisting of industries featured with competition and constant return. Helpman (1984) and Markusen (1984) incorporated elements of "new trade theory" as scale economy and imperfect competition into the general-equilibrium frameworks of FDI and developed the vertical model and horizontal model of FDI, separately. The vertical model can explain FDI between countries with different endowments and the horizontal model can explain FDI between countries of similar endowments. The two basic models were developed and tested later by themselves and other economists. The KK model developed by Markusen(2002), incorporated both vertical and horizontal models. However, those prevalent models always assume that MNEs' headquarters are located in developed countries, thus couldn't provide rationale for the emergence of MNEs headquartered in developing countries. Besides, many works have discussed the rationale behind China's outward FDI in recent years, among which some used OIL paradigm and IDP theory, some considered the institutional evolution, some conducted case studies or questionnaires, and some tested foreign trade or locational factors'effects. However, few tried to interpret China's outward FDI with general-equilibrium approaches.Chapter 3 and chapter 4 respectively develops a new version of general-equilibrium model in the 2×2×2 framework to address MNEs' foreign activities in a monopolistic competitive and oligopolistic industry. Firms consist of a headquarter and two production facilities for intermediate goods, which can be costlessly assembled. The two countries involved are assumed to be identical in preference, technology, but maybe different in endowments. Labor and knowledge capital are used to produce two goods, Y and X. Based on the assumption, six potential enterprise types are considered. Type d:all the production activities are located in domestic country and some final products may export to the foreign country; Type h1:headquarter and intermediate I2 are located in domestic country and intermediate I1 located in both countries; Type h2:headquarter and intermediate I1 are located in domestic country and intermediate I2 located in both countries; Type v1: headquarter and intermediate I2 are located in domestic country and intermediate I1 located in foreign country; Type v2: headquarter and intermediate I1 are located in domestic country and intermediate I2 located in foreign country; Type o:headquarter is located in domestic country and both intermediates and assemble activity located in both countries. Results of numerical simulation show that trade costs, firm level fixed costs and FDI costs can affect the active types of MNEs and their foreign activities in general equilibrium, and the model may give sound explanation for the emergence of MNEs headquartered in labor-abundant countries, such as China.Chapter 5 uses published macro, locational, industrial data about China's OFDI and outlines some empirical facts about the development path, locations and industries of China's OFDI. After reinvestigation on the development phase of China's outward FDI and a quadratic equation test, it is found that around 2007 China's outward FDI turned to the third phase of Dunning(1993)'s investment development path, and economic development is the interior fundamental impetus in spite of the interference of government policy. It can be explained by the formalized general-equilibrium model of electric paradigm, and attributed to the least knowledge capital endowment required and China's abundance of such endowment relative to other developing countries,which can support both knowledge capital-seeking and labor cost-saving FDI activities. Intuitions from the rough data tell that more China's OFDI has flown into developing countries aggregately but more into developed countries averagely. Evidence from quantile regression tells that China's OFDI is significantly correlated with bilateral trade volume between China and host countries, and the fact that being a developing country may not induce more FDI inflow from China except at the low quantile of China's OFDI. The increase of China's OFDI into both developing and developed countries is the result of globalization and specialization of intermediate inputs and the improvement of the political environment influencing China' OFDI. Preliminary estimates with data from industrial level reveals that there are labor-intensive, skilled-labor-intensive, specific capital-intensive and skill-intensive industries targed by China's OFDI and most of them are low value-added and competitive, with few Chinese MNEs in profitable oligopolic industries, which can be ascribed to the knowledge capital endowment of China and the high prerequisite input of knowledge capital in oligopolic industries.Chapter 6 incorporates the government as a player and compares the effects of actively encouraging measure of direct subsidy and negatively improving measure of reciprocal treatment on overseas sales of domestic MNEs and national welfare. If domestic country adopts tax-subsidy measure and the subsidy is large enough, MNEs headquartered in domestic country could effectively raise their overseas sales, except for the situation when domestic country is extremely specific-factor-abundant; while domestic welfare will be significantly worsen due to the tax. If domestic country tries to lower its MNEs'unfairly high FDI costs, its MNEs might be benefited with the proper conditions of factor endowments and industry features; while the welfare will also be lowered if large expenditure is required. It implies that domestic country may have to tradeoff between overseas sales of domestic MNEs and domestic welfare on some occasions when it decides to adopt intervening policies.