The Role Of ODI In Chinese Industrial Structure Upgrading

With the economic growth, China’s outward foreign direct investment(ODI) expands rapidly, which has made China the largest capital exporter in developing countries. What does not match with the rapid increase in the total economy, China is located in the low level of the international industrial chain. The unbalanced development of the domestic industry and the extensive development mode of economy which depends on cheap labor has led to the disadvantage position of China in the global division. According to the traditional international trade theory, China’s ODI flows into countries with lower level of development, such as ASEAN, the South American countries. But the study of ODI in recent years has found a lot of ODI of China flow into developed countries. In this paper, we take the relationship between ODI and the upgrading of the industrial structure of the mother country as a research angle, use both theoretical and empirical research to analyze the relationship between the two, and provide appropriate suggestions about the effect of China’s ODI to upgrade the industrial structure.Based on the summary of previous theoretical studies, we analyze the transmission mechanism of the impact between ODI and the upgrading of home country’ industrial structure.The transmission mechanism can be divided into the direct transmission mechanism (marginal transfer of industries, Industrial linkage effects) and reverse transmission mechanism (reverse technology spillover effects, the following effects and the demand effects).In general, the difference of the purpose of developed and developing countries in ODI leading to different feedback on the industrial structure of the home country. In developed countries, the impact of ODI works through the transfer of marginal industries and industry association effect. However, developing countries such as China can not only transfer the marginal industry to the more backward countries, but also investment in developed countries for reverse technology spillovers.This paper selects the panel data of China’s30provinces from2003to2010to analyze the impact of ODI to upgrading of China’s industrial structure. In order to quantify the upgrading of industrial structure in China, we select Hoffman coefficient (h), total factor productivity (TFP) and the level of the industrial structure coefficient (W) to measure the process of upgrading of industrial structure from the level of heavy industrialization, technology progress and inter-regional industrial structure.Through empirical testing we found that ODI has a positive effect on the heavy industrialization and total factor productivity, but this effect is not significant. The increase of ODI divert the domestic capital investment, which leads to slowing down the development of domestic industries. Based on the theoretical and empirical research, we give suggestions from the angles of enterprises and governments about how to enhance the effect of ODI to upgrading the industrial structure in home country.