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FDI inflows and export quality: Domestic competition and within-firm adjustment

Author

Listed:
  • Liu, Qing
  • Qiu, Larry D.
  • Zhan, Chaoqun

Abstract

Product quality is widely regarded as an important determinant for economic development. This paper investigates whether horizontal foreign direct investment (FDI) improves or deteriorates the quality of domestic firms’ exports. We use China’s FDI regulation changes in 2002 as an instrument variable (IV) for FDI penetration in China to identify the causal impact and introduce a theoretical model to rationalize our empirical work. We find that FDI inflows exert a significantly negative effect on Chinese firms’ export quality. The mechanism of the negative effect is that FDI intensifies the domestic market competition, which induces within-firm adjustment of product mix and lowers domestic firms’ incentive to invest in the quality of new products. In particular, while domestic firms drop some existing products and introduce new products, they invest less in the quality of new products and maintain the quality of continuing products.

Suggested Citation

  • Liu, Qing & Qiu, Larry D. & Zhan, Chaoqun, 2024. "FDI inflows and export quality: Domestic competition and within-firm adjustment," Journal of Development Economics, Elsevier, vol. 170(C).
    • Handle: RePEc:eee:deveco:v:170:y:2024:i:c:s0304387824000427
    DOI: 10.1016/j.jdeveco.2024.103293
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    More about this item

    Keywords

    Foreign direct investment; Product quality; New product; Competition; Chinese firms;
    All these keywords.

    JEL classification:

    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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