FDI inflows and export quality: Domestic competition and within-firm adjustment

Qing LIU; Larry D. QIU; Chaoqun ZHAN

doi:10.1016/j.jdeveco.2024.103293

FDI inflows and export quality: Domestic competition and within-firm adjustment

Qing LIU, Larry D. QIU^*, Chaoqun ZHAN

^*Corresponding author for this work

Department of Economics

Research output: Journal Publications › Journal Article (refereed) › peer-review

4 Citations (Scopus)

Abstract

Product quality is widely regarded as an important determinant for economic development. This paper investigates whether horizontal foreign direct investment (FDI) improves or deteriorates the quality of domestic firms’ exports. We use China’s FDI regulation changes in 2002 as an instrument variable (IV) for FDI penetration in China to identify the causal impact and introduce a theoretical model to rationalize our empirical work. We find that FDI inflows exert a significantly negative effect on Chinese firms’ export quality. The mechanism of the negative effect is that FDI intensifies the domestic market competition, which induces within-firm adjustment of product mix and lowers domestic firms’ incentive to invest in the quality of new products. In particular, while domestic firms drop some existing products and introduce new products, they invest less in the quality of new products and maintain the quality of continuing products.

Original language	English
Article number	103293
Journal	Journal of Development Economics
Volume	170
Early online date	3 Apr 2024
DOIs	https://doi.org/10.1016/j.jdeveco.2024.103293
Publication status	Published - Sept 2024

Bibliographical note

We benefitted from discussions with Costas Arkolakis, Cheng Chen, Micheal Zheng Song, Hongsong Zhang, Yifan Zhang, and participants of the 2021 HKU Trade and Development Workshop. We thank the editor and referees for their very helpful comments and suggestions.

Publisher Copyright:
© 2024 Elsevier B.V.

Funding

Acknowledgment: We benefitted from discussions with Costas Arkolakis, Cheng Chen, Micheal Zheng Song, Hongsong Zhang, Yifan Zhang, and participants of the 2021 HKU Trade and Development Workshop. We thank the editor and referees for their very helpful comments and suggestions. Financial support by the National Social Science Foundation of China ( 23&ZD041 ), the National Science Foundation of China ( 72003208 , 72273035 ) and Lingnan University ( DR21B8 ) is greatly appreciated.

Keywords

Chinese firms
Competition
Foreign direct investment
New product
Product quality

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

Access to Document

10.1016/j.jdeveco.2024.103293

https://linkinghub.elsevier.com/retrieve/pii/S0304387824000427

Cite this

@article{e6932839a8ab4973b9d7ea7eaa89f142,

title = "FDI inflows and export quality: Domestic competition and within-firm adjustment",

abstract = "Product quality is widely regarded as an important determinant for economic development. This paper investigates whether horizontal foreign direct investment (FDI) improves or deteriorates the quality of domestic firms{\textquoteright} exports. We use China{\textquoteright}s FDI regulation changes in 2002 as an instrument variable (IV) for FDI penetration in China to identify the causal impact and introduce a theoretical model to rationalize our empirical work. We find that FDI inflows exert a significantly negative effect on Chinese firms{\textquoteright} export quality. The mechanism of the negative effect is that FDI intensifies the domestic market competition, which induces within-firm adjustment of product mix and lowers domestic firms{\textquoteright} incentive to invest in the quality of new products. In particular, while domestic firms drop some existing products and introduce new products, they invest less in the quality of new products and maintain the quality of continuing products.",

keywords = "Chinese firms, Competition, Foreign direct investment, New product, Product quality",

author = "Qing LIU and QIU, {Larry D.} and Chaoqun ZHAN",

note = "We benefitted from discussions with Costas Arkolakis, Cheng Chen, Micheal Zheng Song, Hongsong Zhang, Yifan Zhang, and participants of the 2021 HKU Trade and Development Workshop. We thank the editor and referees for their very helpful comments and suggestions. Publisher Copyright: {\textcopyright} 2024 Elsevier B.V.",

year = "2024",

month = sep,

doi = "10.1016/j.jdeveco.2024.103293",

language = "English",

volume = "170",

journal = "Journal of Development Economics",

issn = "0304-3878",

publisher = "Elsevier B.V.",

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TY - JOUR

T1 - FDI inflows and export quality: Domestic competition and within-firm adjustment

AU - LIU, Qing

AU - QIU, Larry D.

AU - ZHAN, Chaoqun

N1 - We benefitted from discussions with Costas Arkolakis, Cheng Chen, Micheal Zheng Song, Hongsong Zhang, Yifan Zhang, and participants of the 2021 HKU Trade and Development Workshop. We thank the editor and referees for their very helpful comments and suggestions. Publisher Copyright: © 2024 Elsevier B.V.

PY - 2024/9

Y1 - 2024/9

N2 - Product quality is widely regarded as an important determinant for economic development. This paper investigates whether horizontal foreign direct investment (FDI) improves or deteriorates the quality of domestic firms’ exports. We use China’s FDI regulation changes in 2002 as an instrument variable (IV) for FDI penetration in China to identify the causal impact and introduce a theoretical model to rationalize our empirical work. We find that FDI inflows exert a significantly negative effect on Chinese firms’ export quality. The mechanism of the negative effect is that FDI intensifies the domestic market competition, which induces within-firm adjustment of product mix and lowers domestic firms’ incentive to invest in the quality of new products. In particular, while domestic firms drop some existing products and introduce new products, they invest less in the quality of new products and maintain the quality of continuing products.

AB - Product quality is widely regarded as an important determinant for economic development. This paper investigates whether horizontal foreign direct investment (FDI) improves or deteriorates the quality of domestic firms’ exports. We use China’s FDI regulation changes in 2002 as an instrument variable (IV) for FDI penetration in China to identify the causal impact and introduce a theoretical model to rationalize our empirical work. We find that FDI inflows exert a significantly negative effect on Chinese firms’ export quality. The mechanism of the negative effect is that FDI intensifies the domestic market competition, which induces within-firm adjustment of product mix and lowers domestic firms’ incentive to invest in the quality of new products. In particular, while domestic firms drop some existing products and introduce new products, they invest less in the quality of new products and maintain the quality of continuing products.

KW - Chinese firms

KW - Competition

KW - Foreign direct investment

KW - New product

KW - Product quality

UR - http://www.scopus.com/inward/record.url?scp=85189893580&partnerID=8YFLogxK

U2 - 10.1016/j.jdeveco.2024.103293

DO - 10.1016/j.jdeveco.2024.103293

M3 - Journal Article (refereed)

SN - 0304-3878

VL - 170

JO - Journal of Development Economics

JF - Journal of Development Economics

M1 - 103293

ER -

FDI inflows and export quality: Domestic competition and within-firm adjustment

Abstract

Bibliographical note

Funding

Keywords

UN SDGs

Access to Document

Other files and links

How Does Foreign Direct Investment Affect Export Upgrading: Theory and Evidence from China

Cite this

FDI inflows and export quality: Domestic competition and within-firm adjustment

Abstract

Bibliographical note

Funding

Keywords

UN SDGs

Access to Document

Other files and links

Projects

How Does Foreign Direct Investment Affect Export Upgrading: Theory and Evidence from China

Cite this