What Drives Export Competitiveness? The Role of FDI in Chinese Manufacturing

I. INTRODUCTION Exports have for a long time been viewed as an engine of economic growth. Export competitiveness (XC) is a country's ability to compete globally with growing export capacity, diversifying export basket, and upgrading export technology. (1) XC reflects not only a country's export capacity, but also its technological sophistication and upgrading. Building XC is a long, costly, and risky process, as it calls for large investment in research and development, advanced technology, high-quality infrastructure, and close interactions between firms, universities, and research institutions. While indigenous efforts in these aspects appear to be important, foreign direct investment (FDI) seems to open up alternatives for developing economies to acquire XC, since connectivity to the external sources of technology and market access remains vital for export success. Tapping into international production systems, especially in knowledge-driven sectors, seems to be a good means to gain access to new technology and know how in order to upgrade exports. The FDI-XC linkage is not new but well worth revisiting, especially in the light of the growing attention to the challenge posed by competitiveness and in the light of export sophistication and upgrading in host countries (Caves 1996; UNCTAD 2002; Zhang 2009). The recent literature suggests a key role of export composition in economic growth by emphasizing "what you export matters" (Lall, Weiss, and Zhang 2006; Hausmann, Hwang, and Rodrik 2007; Lederman and Maloney 2012). While further theoretical insights would be valuable, empirical analyses are needed as well for a better understanding of the FDI-XC linkage. This article attempts to work on the issue with Chinese manufacturing panel dataset over the period 2005-2011. Besides the intrinsic importance of the topic, the case of China is of special significance. China has emerged as a new strong exporter in the international manufacturing landscape. As reported in Table 1, China's manufactured exports grew more than 12 times in the 15 years (from $127 billion to $1,496 billion in current prices) since 1995, much faster than the rest of the world. As a result, China's share in world manufactured exports rose dramatically from 3% to 14% in 1995-2010, pushing China up to the No. 1 position from the 10th rank (UNIDO 2013a). Along with the export boom, China experienced rapid structural transformation of manufactured exports as well. The export sophistication has been taking place in manufacturing, away from low value-added toward high value-added production. As Table 1 shows, China's export basket shifted from dominant labor-intensive and low-tech products (such as food and textiles) to more medium- and high-tech products (such as machinery and electrical equipment), which accounted for 65% of the total manufactured exports in 2010. In particular, the high-tech share in total manufactured exports nearly doubled, from 24% to 41%. (2) China's export boom, from $18 billion in 1980 to $2,049 billion in 2012 (NBSC 2013), was accompanied by a substantial rise in FDI inflows. From almost an isolated economy, China has been the most attractive location for investments by multinational corporations (MNCs) for the past decades, receiving the largest amount of FDI in the developing countries, and globally the second with $120 billion inflows in 2012 and $833 billion stock by the end of 2012 (UNCTAD 2013). The exports generated by foreign-invested enterprises (FIEs) rose much faster than those by domestic firms, constituting more than half of China's total exports (Figure 1). It is widely believed that FDI inflows and domestic absorption capability are crucial factors behind China's export miracle (Zhang and Song 2000; UNCTAD 2002; Zhang 2007; UNIDO 2013a). Table 2 presents some indicators about the role of FDI in the Chinese export performance. In merely 10 years manufactured exports generated by FIEs increased by more than 10 times to $995 billion, accounting for 52% of China's total manufactured exports in 2011. …