export promotion of ofdi from emerging markets...

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Export Promotion of OFDI from Emerging Markets – Transaction-level Evidence from China

Wenjie Chen (GWU, School of Business)

Heiwai Tang (Johns Hopkins University, SAIS and CESIfo)

GWU China Conference G2 @ GW, Nov 8, 2013

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  China is the world’s fifth largest direct investor

  Headlines:   Shuanghui acquires

Smithfield   CNOOC’s plan to invest in

Unocal   Geely buys Volvo of

Sweden   Drastic growth of the

country’s OFDI in recent years deserves further investigation.

-

10 000.0

20 000.0

30 000.0

40 000.0

50 000.0

60 000.0

70 000.0

80 000.0

90 000.0

in U

S$

mil

Chinese Outward Direct Investment Flows

Background

Source: UNCTAD, 2012

Motivation Introduction Methodology

Data Results Conclusion

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Mining

Wholesale and retail trade

Banking

Leasing and business services

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010

Share of China’s OFDI flows



Source: China’s Ministry of Commerce

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  Typical motives for OFDI:

  Resource seeking

  Technology seeking

  Export promotion (market seeking)

  The share of OFDI from “Leasing and Business Services” + “Wholesale and Retail Trade” accounted for over half of the aggregate volume of China’s OFDI flows in 2010 (27 percent in 2006).

  Benchmark: Mining (8 percent) and banking (13 percent) of OFDI flows in 2010

Background



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Background

  Common perception is that Chinese OFDI have resource and technology seeking motives

  Our focus is on export promotion

  Entering new export market requires overcoming fixed costs, uncertainty, and other business obstacles:

  Adapting to new customers’ taste and demand

  Adjusting to host country’s business climate, cultural patterns, structure of market system

  Complying with host countries’ local regulations and requirements

  Solution: Setting up office in host country to tackle obstacles mentioned above

Question Introduction Methodology


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Research Question

  Using comprehensive micro data, we ask:

  Does FDI complement or substitute firm exports?

  At which margin of exports does FDI complement or substitute exports?

  How does FDI affect trade performance?

  Are there third-market effects of FDI on exports?

Question Introduction Methodology


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Preview of Results

  Using merged data between customs transaction-level trade data and our OFDI firm data (1,800 firms over 2000-2006):

  Findings: after conducting OFDI, firms’   Export volume, unit values, varieties, and destinations all

increase;   Diversification away from core competencies;

Introduction Methodology


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Preview of Results con’t

  Findings: after conducting OFDI, firms’   Capital and skill intensities of exports increases;

  Third-market effects: increase in unit values, skill and advertising intensity of new products;

  Conclusion:   FDI from China complements rather than substitutes

exports. OFDI also raises level of sophistication of firm’s exports

  It is worth noting that the complementary effects are not confined to the OFDI destination only



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Literature Review

  Chinese OFDI: Deng (2003, 2004); Buckley et al. (2007); Antkiewicz and Whalley (2007); Cheng and Ma (2007); Huang and Wang (2011)   FDI and exports as substitutes: Brainard (1997); Markusen and Venables (2000); and Helpman, Melitz, and Yeaple (2004)   FDI and exports as complements: Lipsey and Weiss (1981, 1984); Yamawaki (2001); Graham (2000); Clausing (2000)   Both complementarity and substitution effects: Blonigen (2001) and Conconi et al. (2012)   Export-platform production: Antras (2003); Grossman, Helpman, and Szeidl (2003); Yeaple (2003); Conconi et al. 2012



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Contribution

  Provides micro evidence on OFDI from developing countries

  Documents detailed relationship between OFDI and trade at firm and sub-firm level

  Factor intensities of exports after OFDI

  New Product Dimension

  Examines third-market effects

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Data

  Outward foreign direct investments by Chinese companies provided by the China’s Ministry of Commerce.

  The data set covers OFDI deals between January 1, 1998 and December 31, 2009.

  Contains information on investing firm's name, firm's industry, province of origin, and the destination of the investment.

  No value of the deal.

  9,744 deals from 7,202 unique firms (most comprehensive we are aware of).

  Compare the number of deals in our data with those studied by Huang and Wang (2011). Our data set covers 90 percent of the deals from Zhejiang, the province they focus on over the same sample period.

OFDI Data Introduction Methodology


Top 10 OFDI destinations

OFDI Data Introduction Methodology


Country Frequency Percent

Hong Kong, China 1,946 19.97

United States 918 9.42

Russian FederaBon 551 5.65

Vietnam 464 4.76

United Arab Emirates 370 3.8

Japan 360 3.69

Korea, Rep. 299 3.07

Germany 270 2.77

Lao PDR 267 2.74

Australia 236 2.42

Evidence from Customs Transaction-level Trade Data

Customs Data Introduction Methodology


Customs Trade Data

  The universe of Chinese import and export transactions 2000 and 2006.

  Data on imports and exports (in USD) at the HS 8-digit (>7,000 products) level from a firm to/from each country.

  60-80% of the deals can be merged.

Customs Data Introduction Methodology


Margin of Exports - Breakdown

  Follow Bernard, Redding and Schott (2009), decompose firm export volume into various margins:

  where Xi is firm i’s volume of exports (in a given year)   Nic is # of countries   Nih is # of products exported   oich is firm’s number of positive country-product transactions

  A   A

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and

Export and OFDI Introduction Methodology


Margins of Export – Extensive Margin

Across all Countries

Dependent Var: ln(Exp value) ln(# of

country) ln(# of HS6)

ln(Avg Exp) ln(Density)

OFDI dummy 0.336*** 0.128*** 0.136*** 0.148*** -0.075*** (0.045) (0.020) (0.021) (0.034) (0.014)

Firm FE Yes Yes Yes Yes Yes Year FE Yes Yes Yes Yes Yes R-squared .0781 .0767 .03 .0327 .0363 Nb of Obs 628048 628048 628048 628048 628048 * p<0.05; ** p<0.01; *** p<0.001.

OFDI = 1 for all firm-years when and after a firm reported overseas investment. Robust standard errors reported in brackets.

Controlling for firm and year fixed effects



Margins of Export – Intensive Margin

Same Country as OFDI Destination

Dependent Var: ln(Exp value) ln(#of HS6) ln(Average Exp)

OFDI dummy 0.116*** 0.0487*** 0.0674*** (0.014) (0.006) (0.012)

Firm FE Yes Yes Yes Year FE Yes Yes Yes R-squared .0322 .0144 .0225 Nb of Obs 5691703 5691703 5691703 * p<0.05; ** p<0.01; *** p<0.001.





Unit Value of Products after OFDI

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Dep Variable: log Unit Value OFDI dummy (OD) 0.187***

(0.012)

OD same country 0.214*** (0.029)

OD diff country 0.184*** (0.012)

OD same; adv 0.269*** (0.049)

OD same; dev 0.179*** (0.034)

OD diff; adv 0.174*** (0.021)

OD diff; dev 0.189*** (0.015)

Firm FE Yes Yes Yes Country FE Yes Yes Yes R-squared 0.336 0.336 0.336

Nb of Obs 24,980,644 24,980,644 24,980,644 * p<0.05; ** p<0.01; *** p<0.001. OFDI = 1 for all firm-years when and after a firm reported overseas investment. Robust standard errors reported in brackets.

OFDI and Customs Introduction Methodology


Factor Intensity of Products after OFDI

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Dep Variable: log K int log S int log RD int log ADV int

OFDI dummy (OD) 0.187*** 0.006 0.023 0.021

(0.012) (0.004) (0.021) (0.018)

Firm FE Yes Yes Yes Yes

Year FE Yes Yes Yes Yes

Nb of Obs 751379 750436 745641 747990

* p<0.05; ** p<0.01; *** p<0.001.





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Dep Variable: log(Knew /

Kold) log(Knew /

Kold)

log(Snew /Sold)

log(Snew /Sold)

log(RDnew /RDold )

log(RDnew /RDold )

log(ADnew /ADold)

log(ADnew /ADold)

OFDI Dummy (OD) -0.031+ 0.001 -0.01 0.033

(0.016) (0.007) (0.040) (0.033) OD same country 0.023 0.026*** 0.065 0.080**

(0.017) (0.008) (0.040) (0.034) OD different country 0.014 0.022*** 0.046 0.066**

(0.016) (0.008) (0.040) (0.032)

Nb of Obs 389610 390740 389203 390332 386044 387166 387881 389008

* p<0.05; ** p<0.01; *** p<0.001.

OFDI = 1 for all firm-years when and after a firm reported overseas investment. Robust standard errors reported in brackets. Controlling for firm and year fixed effects

New Product Dimension



Ratio of export-weighted average of intensity measure for newly added products to existing products

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Dep Variable: Log(Knew /Kold) log(Snew /Sold) log(RDnew /

RDold ) log(ADnew /

ADold)

OD same; adv -0.001 0.029** 0.054 0.140**

(0.027) (0.013) (0.070) (0.056)

OD same; dev 0.041+ 0.023** 0.072 0.037

(0.022) (0.010) (0.047) (0.041)

OD diff; adv -0.008 0.024+ 0.013 0.124**

(0.025) (0.012) (0.066) (0.054)

OD diff; dev 0.029 0.021** 0.070 0.022

(0.021) (0.010) (0.048) (0.040)

Nb of Obs 390740 390332 387166 389008 * p<0.05; ** p<0.01; *** p<0.001. OFDI = 1 for all firm-years when and after a firm reported overseas investment. Robust standard errors reported in brackets.


New Product Dimension



Robustness Checks

  Exclude firms that invest to Hong Kong

  Exclude processing firms

  Different measures of factor intensity

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Conclusion

  Firms conducting OFDI experience increase in   # of countries, # of products, avg value of sales per product-

country line, and spread out its sales away from core competencies (i.e., less concentrated).

  OFDI helps firms export more “difficult” products (e.g., skill-intensive & advertisement-intensive).

  We also find interesting third-market effects complementing existing literature

  Highlight that horizontal OFDI from exporters in developing countries two purposes:   Lowers export costs in host countries;   Transfer skill and marketing capabilities that help penetrate in

other markets as well

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Thank You! Comments welcome!

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  APPENDIX

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Examples of OFDI and Export Firms

  Company: Nanjing Textiles Import & Export Corp Ltd. (南京纺织品进出口股份有限公司)   Foreign Affiliate: HotPoint Ltd. (热点（澳大利亚）有限公司)

  Company: Jiangsu Guotai International Group (江苏国泰国际集团国贸股份有限公司)   Foreign Affiliate: 江苏国泰国际集团国贸股份有限公司驻德国代表处

  Company: Heilongjiang Huayu Industry and Trade Co.,Ltd (黑龙江华宇工贸集团有限责任公司)   Foreign Affiliate : Huahai Wood. Ltd. 东宁县华宇木业有限责任公司

(东宁县华海木业有限责任公司)   Company: Xiamen Overseas Chinese Electronic Co., Ltd. (厦門华侨电子股份有限公司)   Foreign Affiliate : Sinoprima (厦华电子南非公司)

  Company: Haier Group (海尔集团电器产业有限公司)   Foreign Affiliate : Haier Europe (海尔（欧洲）控股公司)

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Characteristics of OFDI Firms from Manufacturing Firm Survey

Manufacturing Firm Survey Data

  Source: National Bureau of Statistics (NBS),1998-2009

  All state-owned firms and all private firms with sales > 5 million RMB (about 600K USD during the sample period)

  Balanced-sheet variables: firm ownership, output, value added, exports

  Merge it with our OFDI data based on firm name;

  27-55% of the deals can be merged

NBS Data Introduction Methodology


OFDI “Effects” on Firm Size and Performance

Dep Var: ln(Sales) ln(Value Added) ln(Emp) OFDI 2.056*** -0.027 1.809***

(0.342) (0.050) (0.287) R-squared 0.424 0.245 0.369 Nb of Obs. 2352687 1515828 2718572

Dep Var: Labor prod Export/ Sales ln(Value Added/

Sales) ln(RD/Sales) OFDI 0.278* 0.260*** -0.008 0.298***

(0.108) (0.016) (0.013) (0.078) R-squared 0.56 0.272 0.251 0.187 Nb of Obs. 2531859 2352687 1551447 902316 OFDI = 1 for all firm-years when and after a firm reported overseas investment. The number of observations fluctuates because data for some variables are not available in all years (e.g., R&D only for 2003-2005). Standard errors, clustered at the industry level (2-digit), are in brackets. * p<0.05; ** p<0.01; *** p<0.001

Controlling for firm and year fixed effects:

OFDI and NBS Introduction Methodology


OFDI Participation

Dependent Var OFDI Dummy Sample All Exclude HK as a Host ln(Sales) 0.233*** 0.213***

(0.013) (0.014) ln(Empl) 0.0649*** 0.0694***

(0.014) (0.015) SOE -‐0.178*** -‐0.222***

(0.049) (0.055) HKMT -‐0.342*** -‐0.409***

(0.027) (0.031) Foreign -‐0.289*** -‐0.290***

(0.025) (0.026) ln(Labor Prod) -‐0.009 -‐0.006

(0.011) (0.012) Exp/Sales 0.596*** 0.606***

(0.025) (0.026) Raw material/Sales -‐0.049 -‐0.070

(0.062) (0.066) Industry FE Yes Yes Province FE Yes Yes N 979884 979544 OFDI = 1 for all firm-years when and after a firm reported overseas investment. The number of observations fluctuates because data for some variables are not available in all years (e.g., R&D only for 2003-2005). Standard errors, clustered at the industry level (2-digit), are in brackets. * p<0.05; ** p<0.01; *** p<0.001

OFDI and NBS Introduction Methodology


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OD same; adv 0.047** 0.038*** -0.009 0.043

(0.018) (0.010) (0.052) (0.045)

OD same ; dev -0.011 -0.008 -0.107*** -0.060**

(0.015) (0.007) (0.032) (0.029)

OD diff; adv -0.012 -0.005 0.023 -0.034

(0.015) (0.007) (0.039) (0.033)

OD diff ; dev 0.041*** 0.009 -0.044 -0.021

(0.012) (0.006) (0.030) (0.025)

Nb of Obs 752625 751680 746880 749233 * p<0.05; ** p<0.01; *** p<0.001.



Factor Intensity of Products after OFDI



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Same country 0.016 0.013** -0.063** -0.013

(0.012) (0.006) (0.030) (0.026)

Diff country 0.017+ 0.002 -0.015 -0.027

(0.009) (0.005) (0.024) (0.020)

Firm FE Yes Yes Yes Yes

Year FE Yes Yes Yes Yes

Nb of Obs 752625 751680 746880 749233 * p<0.05; ** p<0.01; *** p<0.001. OFDI = 1 for all firm-years when and after a firm reported overseas investment. Robust standard errors reported in brackets.


Third Market Effects

