Foreign Capital Entry and National Value Chain Upgrade
GUO Juanjuan, XIAN Guoming, XU Bangdong
Institute of World Economy, Shanghai Academy of Social Sciences; School of Economics, Nankai University; School of Economics and Management; Weifang University
Summary:
Given the uncertain international situation, China should take full advantage of the strength of its domestic market by tapping the potential of domestic demand to establish a new development paradigm with domestic circulation as its mainstay, thereby resolving the impact of external shocks and demand contraction.Besides, China should also continue to expand its high-level opening-up to the outside world to attract more foreign investment and accelerate the implementation of major foreign-funded projects. This wouldnot only promote the country's industrial transformation and upgrading,but also enhance its status and infuence in global industrial chains, supply chains, and innovation chains. Investment from multinational enterprises is key for developing national value chains and promoting the connection between domestic and international circulation, and thus will underpin the formation of a new development pattern in which domestic and international circulations promote each other. Accordingly, this study explores the impact of foreign investment on the upgrading of China's national value chains by systematically examining an interregional input-output table of 30 provinces using exploratory spatial data analysis and spatial weight matrices. The empirical results show that FDI has a significant promoting effect on the upgrading of China's national value chains. Regions that receive FDI not only obtain a direct technology spillover but also benefit from “involuntary” spillovers from neighboring regions. The spillover effect of FDI is strongest within the province. Compared in regions with lower levels of technology and FDI, in regions with higher levels of technology and FDI, national value chains are more strongly promoted by FDI entry. Compared with inland areas, FDI entry in coastal areas is more conducive to the upgrading of national value chains. Furthermore, the higher the degree of marketization in an area, the more that FDI entry promotes domestic value chains in the area, and the spillover is most strengthened within the area. Finally, FDI can significantly optimize local industrial structures by upgrading national value chains, and its direct upgrading effect is more significant than its indirect upgrading effect. This study makes several contributions. First, it investigates the impact of foreign capital entry on the upgrading of China's national value chain. The findings could serve as a reference to aid the promotion of China's national value chain and the balanced and coordinated development of various regions, and could also contribute to the establishment of a new development pattern of domestic and international circulation. Second, given the strong spatial correlations among the national value chains in different regions, the spatial econometric model adopted in this study is a useful methodological tool with which to measure the spatial correlation and spillover effect of FDI into adjacent areas. This model is also less susceptible to reverse causality than other models, which enhances the credibility of our empirical results. Third, considering that national value chains play a key role in improving regional industrial structures, and that attracting foreign investment is required for developing national value chains and constructing an integrated domestic market, this study further analyzes the effect of foreign investment on the upgrading of local industrial structures through the channel of domestic value chains.
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