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How factor market distortions affect OFDI: An explanation based on investment propensity and productivity effects

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  • Kong, Qunxi
  • Tong, Xin
  • Peng, Dan
  • Wong, Zoey
  • Chen, Huy

Abstract

Based on A-share listed companies' data from 2008 to 2018, we study the influence of factor market distortions on enterprises' outward foreign direct investment (OFDI) behavioral decisions and their effect on enterprises' investment productivity. We further analyze the influence of regional heterogeneity and enterprise ownership heterogeneity. First, the results show that factor market distortions suppress the outward FDI tendency of enterprises, and there are negative distortions of capital and positive distortions of labor in most regions of China. Second, there are general productivity effects on OFDI behavior. In other words, firms in non-factor-intensive and distorted regions can increase their productivity through OFDI. Third, factor market distortions and capital distortions in the eastern region enhance the investment propensity of local firms, whereas factor market distortions in the northeast, central, and western regions dampen the investment propensity of local firms. In addition, capital market distortions have a less dampening effect on SOEs and FIEs, and labor distortions have a more promoting effect on the investment propensity of FIEs and private firms.

Suggested Citation

  • Kong, Qunxi & Tong, Xin & Peng, Dan & Wong, Zoey & Chen, Huy, 2021. "How factor market distortions affect OFDI: An explanation based on investment propensity and productivity effects," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 459-472.
    • Handle: RePEc:eee:reveco:v:73:y:2021:i:c:p:459-472
    DOI: 10.1016/j.iref.2020.12.025
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