FDI, Export Sophistication, and Quality Upgrading: Evidence from China's WTO Accession

This paper identifies a positive effect of FDI liberalization on manufacturing export sophistication, exploiting China's adjustment of its Catalogue for the Guidance of Foreign Investment Industries upon its accession to WTO. It further investigates the underlying causes in the lines of firm ownership type, trade mode, product type, and intensive vs. extensive margins. The positive effect comes from, e.g., the increase in the export share of foreign-invested enterprises (FIEs) and firms with processing trade, and the increase in the export sophistication of privately-owned enterprises (POEs), of ordinary trade, and of intermediate goods. The intensive margin rather than extensive margin is accountable for the effect. Liberalizing FDI does not seem to have any significant effect on product quality.

Automated summary

This study identifies a positive effect of FDI liberalization on manufacturing export sophistication, particularly in terms of the export share of foreign-invested enterprises and firms with processing trade, as well as the export sophistication of privately-owned enterprises, ordinary trade, and intermediate goods. The intensive margin, as opposed to the extensive margin, is found to be responsible for this effect, with no significant impact on product quality observed from liberalizing FDI.