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| FDI Withdrawal and the Measurement ofIndustrial Chain Risk Exposure |
| CHEN Fuzhong, LUO Ke, DONG Kangyin
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| School of International Trade and Economics, University of International Business and Economics |
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Abstract Since the reform and opening up, the absorption of foreign direct investment (FDI) and the integration into the global value chains (GVCs) led by multinational corporations (MNCs) have been the key driving factors for China's export expansion and rapid economic growth. However, external uncertainties, such as geopolitical conflicts, strategic competition among major powers, and public crises, have hindered the current expansion of GVCs. Security concerns have gradually become the primary consideration for MNCs in shaping investment destinations. As for China, with the rise of domestic factor costs, some foreign enterprises are relocating their production lines to neighboring countries with lower production costs. Simultaneously, many Western countries have initiated trends of “reshoring”, “friend-shoring” and “near-shoring” outsourcing of industrial chains so as to marginalize China within GVCs. In this context, the withdrawal of MNCs may pose dual hidden risks to China's “dual-circulation” economic strategy. Therefore, assessing the risk exposure resulting from the FDI withdrawal is beneficial for China to effectively establish a more resilient industrial chain division of labor system, and ultimately safeguard national economic security.
Based on the global input-output tables that distinguish between domestic and foreign enterprises and the production decomposition model, this paper mainly uses the hypothetical extraction method (HEM) to comprehensively measure and compare the risk exposure induced by FDI withdrawal from 2000 to 2020, and further dissects the “dual circulation” structure of the risk exposure. The main conclusions of this paper are as follows. First, the maximum risk exposure induced by complete FDI withdrawal in China's industrial chain roughly shows an evolutionary pattern of “initial rising-subsequent falling”, in which the loss rate of value added in the domestic circulation is higher than that in the international circulation. Second, in terms of industry sectoral distribution, the risk exposure of FDI withdrawal from manufacturing industries is generally larger than that in services and primary sectors. High-R&D-intensity manufacturing industries exhibit the highest risk exposure with strong risk spillover effects. Furthermore, as for the country of origins, the potential risk exposure induced by FDI withdrawal mainly originate from developed economies such as Japan, the United States and South Korea. On a global scale, the FDI risk exposure of typical developed countries is relatively stable, while the FDI risk exposure of developing countries such as Mexico, Thailand and Viet Nam has shown a tendency to expand. In recent years, the “center-periphery” distribution of global FDI risk exposure has become more distinctive. Finally, when considering factors such as the withdrawal rate of FDI and the substitution rate of domestic enterprises, as well as the destination and the decoupling rate of FDI, the level of China's overall FDI risk exposure declines.
The marginal contributions of this paper are mainly as follows. First, this paper innovatively applies the hypothetical extraction method (HEM) to measure the risk exposure arising from the FDI withdrawal capturing the complex interlinkages between foreign capital and China's dual-circulation economic system. Specifically, this paper removes foreign-owned components domestically from the input-output table, and then compares changes in the “dual-circulation” value-added before and after the removal to assess the degree of risk exposure resulting from the FDI withdrawal. Second, this paper compares the industry sectoral distribution and country origins of FDI risk exposure to identify the primary sources of hidden risks. Additionally, it makes a horizontal comparison of the FDI risk exposure across major economies and observes the spatial pattern and bilateral dynamics of global FDI risk exposure. Third, this paper enriches the extension framework of the HEM model by incorporating factors such as the withdrawal rate of FDI and the substitution rate of domestic enterprises, as well as the destination and the decoupling rate of FDI, which helps to explore feasible strategies and solutions for enhancing the resilience of China's industrial supply chains.
The findings of this paper provide some policy implications. First, China should closely monitor the trends and spatial distribution of the FDI withdrawal, with a particular focus on industrial chain links within the domestic circulation that are prominently reliant on foreign capital. Meanwhile, China should enhance the diversity of FDI sources, thereby effectively diversifying the risks involved in the utilization of FDI. Second, China needs to increase innovation subsidies to support domestic basic research and key technological breakthroughs, motivating domestic enterprises to enhance their independent innovation capabilities to address their weaknesses. Third, China needs to actively establish risk buffer zones, fully activate the potential of regional cooperation platforms such as the Belt and Road Initiative (BRI) and the Regional Comprehensive Economic Partnership (RCEP), and extensively utilize third-party market resources to build a more resilient global supply chain network.
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Received: 25 July 2024
Published: 02 December 2024
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