The Effects Of Trade Liberalization On FDI Strategies In Heterogeneous Firms

In recent years, the world economy has been constantly changing, and developing countries'economy has being developing so quickly. Especially, the amount of foreign direct investment in developing countries has markedly increased. According to World Investment Report 2014, with total FDI flows of 426 billion in 2013, developing Asia countries accounted for nearly 30 per cent of the global total and remained the world's number one recipient region, and inflows to South-East Asia increased by 7 per cent, and South Asia area had increased by 10 per cent(mainly from Vietnam). On the other hand, globalization has deeply progressed, and trade liberalization is becoming the main trend of the world. In order to improve their economy, developing countries had constantly signed Free Trade Agreements (FTA) with neighboring countries, these agreements greatly improved trade liberalization between them. But what's the relationship between trade liberalization in developing countries and the rapid increase in FDI? And is trade liberalization the driving force for the surge increase in FDI in developing countries?To explain this, this paper first extends the Helpman et al. (2004) model to theoretically examine the mechanics of firms FDI choice, especially stress the role of trade cost. Particularly, we divide FDI into VFDI and HFDI, and abandon the hypotheses of wages in different countries are homogeneous and unitized. Next, we empirically investigate Chinese firms'FDI choice in India. Indonesia, Thailand, Malaysia, and Philippines by estimating the discrete choice model and multinomial logit model using Chinese Industrial Enterprises Database and Customs Statistics Database.The paper chose tariff as the indicator of trade liberalization, we found tariff changes itself can't explain the reason why trade liberalization stimulate the growth of FDI in developing countries. But when we used interaction terms with a productivity quartile dummy and tariff changes as explanatory variables, however, we found tariff reduction has a significant positive effect on FDI in developing countries. Especially, tariff reduction attracts the middle range of productive firms to VFDI but does not attract the most productive or the least productive firms.Particularly, because developing countries, especially Asian countries, experienced a relatively rapid decrease in tariff rates in recent years, we conclude that the increase in VFDI through a reduction in the tariff rates led to the recent relative surge of FDIs in developing countries...