The Impact Of FDI On China's GVC Division Position

Since the 1990 s,with the opening of markets,the reduction of trade barriers,and the rapid development of transportation and communication technology,the cost of transnational production and sales has decreased.A new production model featuring the expansion of the global vertical production network has emerged,and the global economy is increasingly built based on global value chains.Multinational companies use FDI and outsourcing to allocate activities to a certain degree of standardization to low-cost countries or regions worldwide.FDI,outsourcing and global procurement build a complex global production network.Since the reform and opening up,China has been introducing a large amount of foreign capital,developing processing trade,actively integrating into the global economy,and embedding it into global value chains.The scale of China's trade is very large.But due to the relatively high proportion of processing trade,China as a whole is still in the middle and low ends of the global manufacturing,industrial chains and value chains.At the same time as multinational companies transferred the low-end activities of value chains to China,many high-pollution and high-energy-consumption companies entered China,and the transfer of pollution increased the burden on China's ecological environment.Rising domestic labor costs,anti-globalization trends and increasing global trade frictions have made it more difficult for China to introduce foreign capital.Facing such a situation,a correct understanding of whether and how FDI affects China's GVC division position will help China formulate a reasonable FDI policy,optimize investment structure,improve FDI quality,improve China's GVC division position,expand economic income and promote economic growth.GVC division theory is the inheritance and development of comparative advantage theory,factor endowment theory,and economies of scale theory.Analysis of the impact of FDI on international division of labor in the integration and development of FDI theory and theory of international division of labor is basically applicable in the context of GVC.It just changed from the division of the final product to the division of the different activity links in the value chain.The comparative advantage of each country or region affects the international division of labor.FDI affects the international division of labor through the comparative advantage of productivity and factor endowment in each country or region.According to the definition of comparative advantage,the comparativeadvantage of a country or region is affected by domestic and foreign factors.For example,the comparative advantages of a country's productivities in different activities of the value chain are affected by productivities of the country and foreign countries in different activities of the value chain.The comparative advantages of a country's factor endowments at different stages of the value chain are affected by the factor endowments of that country and foreign countries.In the static analysis,the factor endowments and productivities in different activities of the value chain of the host country and the home country will not change.Therefore,FDI will not affect the host country's GVC division position.In the dynamic analysis,FDI changes the host country's comparative advantage in productivity through the productivities of high-end and low-end activities in the host country and the home country,thereby changing the host country's GVC division position.FDI changes the host country's comparative advantage of factor endowment through the factor endowments of the host country and the home country,thereby changing the host country's GVC division position.Previous research on the impact of FDI on the host country's GVC division position considers that FDI affects the host country's GVC division position by changing the technology of the host country.Few literatures analyze the impact of FDI on the GVC division position based on comparative advantage which is the basis of international division of labor.This paper analyzes that FDI affects the comparative advantage of the host country through productivities and factor endowments of the host country and the home country,and then affects the host country's GVC division position.The average project size,technology level,and export capacity of FDI indicate that China's FDI mainly flows to the low-end activities of the value chain.China's comparative advantage,the global consumer subject being developed countries,and China's low human capital explain the main reasons why FDI flows to the lower end of the value chain.This paper uses 2004-2011 industry-level data,and empirical research finds that FDI has generally improved China's GVC division position.Specifically,FDI has increased China's GVC division position by increasing the ratio of the productivity of the high-end activity link to the productivity of the low-end activity link.From 2004 to2011,FDI mainly flowed into the low-end activity link.FDI mainly adopted vertical intangible asset transfers rather than horizontal intangible asset transfers to increase productivities of China's high-end activity links.Through the demonstration effect,competition effect,and personnel flow effect,FDI makes the gap between productivities of China's low-end activities and productivities of foreign low-end activities continue to narrow,tending to be consistent.FDI has gradually increased productivities of high-end activity links,and China's GVC division position has improved.FDI has reduced China's GVC division position by increasing the ratio of the productivity of the high-end activity link to the productivity of the low-end activity link in the home country.Multinational companies transfer the low-end activities of value chains to China through FDI,and the parent companies of multinational companies are mainly engaged in the high-end activities of value chains.Due to the effect of export learning,productivities of low-end activities in the home country have decreased.Through demonstration effect,personnel flow effect,competition effect,and economies of scale,productivities of high-end activities in the home country have increased,and China's GVC division position has declined.Through factor endowments of China and the home country,FDI has no significant impact on China's GVC division position.Because FDI mainly flows into the low-end activities of value chains,while reducing the capital of the home country,it also reduces the employment of the home country,resulting in the home country's factor endowment structure being unchanged,which has no impact on China's GVC division position.Because FDI mainly flows into the low-end activities of value chains,while increasing China's capital,it also increases China's employment,resulting in the same factor endowment structure in China,which has no impact on China's GVC division position.This paper further performs group panel regression on industries with different productivities and different GVC participation.It is found that FDI has a positive impact on the GVC division position in China's industries with lower productivities.FDI has a negative effect on the GVC division position in China's industries with higher productivities,but it is not significant.FDI has different impacts on the GVC division position of Chinese industries at different levels of productivity.It may be because for industries with lower productivity levels,it is easier for FDI to gradually increase China's and home country's productivities of high-end activity links through demonstration effect,competition effect,and personnel flow effect,and FDI affects the former more than the latter,thereby improving China's GVC division position.Compared with industries with low and medium GVC participation,FDI has a more significant positive impact on theGVC division position in China's industries with high GVC participation.This result indicates that only when GVC participation reaches a certain level,the demonstration effect,competition effect,and personnel flow effect of FDI will gradually increase productivities of China's high-end activity links,and China's GVC division position will increase.Only when GVC participation reaches a certain level will FDI promote the upgrading of the home country's factor endowment structure and reduce China's GVC division positon.And the former's role is greater than the latter's role,so FDI has a positive impact on the GVC division position of China's high GVC participation industries.If FDI mainly flows into the high-end activities of value chains,the type of FDI is mainly market-seeking.The existence of export learning effect makes productivities of high-end activities in the home country decline.After decades of development,the gap between productivities of China's low-end activity links and productivities of foreign low-end activity links has continued to narrow and becomes more consistent.If FDI mainly flows into the high-end activities of value chains,it will be conducive to productivities' improvement of China's high-end activities.High-end activities of value chains are often capital and technology-intensive.If FDI mainly flows into high-end activities of value chains,the capital reduction in the home country will far exceed the employment reduction in the home country,which will hinder the upgrade of the factor endowment structure in the home country.If FDI mainly flows into high-end activities of value chains,it will help China's capital accumulation and promote the upgrade of China's factor endowment structure.Therefore,If FDI flows into high-end activities of value chains,China's GVC division position will be enhanced through productivities and factor endowments in China and home countries.FDI is an important way for China to integrate into the global value chain.Using FDI to improve China's GVC division position requires both “following the trend” and“creating the trend”.China should promote trade and investment facilitation to attract FDI,increase the use of low-end FDI,promote the absorption of high-end FDI,adjust the tax system to guide FDI to the high-end links of value chains,improve independent innovation capabilities,and promote the clustering of high-tech industries.