Outward FDI and Domestic Input Distortions: Evidence from Chinese Firms

This paper examines how domestic distortions a ect firms’ investment strategies abroad. The study first documents puzzling empirical findings concerning Chinese multina- tional corporations, which include that private multinational corporations are less productive than state-owned multinational corporations. A theoretical model is built to rationalize these findings and yields additional empirically consistent predictions. The key insight is that dis- crimination against private firms domestically incentivizes these firms to produce abroad, which results in less tough selection into foreign direct investment for them. A calibra- tion exercise shows the quantitative impacts of domestic distortions on gains in aggregate productivity after investment liberalization.