The dragon soars: Micro evidence on Chinese outward direct investment
Heiwai Tang, Wenjie Chen 22 September 2014
Using a new, unique, and comprehensive data set that covers close to 19,000 Chinese ODI deals from 1998 to 2011, we find that in contrast to the common perception, over half of the ODI deals are in service sectors, with many of them appearing to be related to export promotion. Ex ante larger, more productive, and more export-intensive firms are more likely to start investing abroad. Ex post, ODI appears to enhance firm performance (i.e., total factor productivity, employment, export intensity, and product innovation). Empirical analysis based on firms’ trade transaction data shows a significantly positive effect of ODI on firms’ trade performance, but little technology transfer.
China’s active acquisition of foreign assets has raised anxiety and tension across the world. In 2010, it was the world’s fifth largest source of foreign direct investment after the United States, France, Germany, and Japan.1 He et al. (2012) predict that China’s cumulative outward direct investment (ODI) will exceed $5 trillion USD in 2020, compared to a mere $3 billion in 2010. Given the sheer size of China, the volume of its ODI may be expected; but considering its relatively early stage of development, its recent surge in ODI surprised many.
China, FDI, outward FDI
Trade liberalisation, quality upgrading, and export prices
Haichao Fan, Yao Amber Li, Stephen Yeaple 06 September 2014
Trade liberalisation has transformed the economies of many developing countries. This column presents evidence from China’s accession to the WTO. The authors find that high tariffs on imported inputs prevented Chinese firms from producing high-quality goods. When these tariffs were reduced, firms upgraded the quality of their products, entering more competitive foreign markets.
Rapid trade liberalisation has transformed the economies of many developing countries. As these countries have scaled back tariffs, their firms have gained access to cheaper and higher quality intermediate inputs from abroad. A growing literature shows that trade liberalisation has led to a surge in imports of intermediate inputs and that the improved access to foreign-made inputs has had a large impact on firm productivity and product scope (e.g. Amiti and Konings 2007; Goldberg et al. 2010).
International trade Productivity and Innovation
tariff reduction, Export prices, China, goods quality
Will Chinese household savings plummet with the end of the one-child policy? Maybe, maybe not….
Abhijit Banerjee, Xin Meng, Tommaso Porzio, Nancy Qian 04 September 2014
The loosening of the one-child policy will transform China’s demographic development in coming years, but it also runs the risk of lowering China’s high rate of personal savings. This column argues that high estimates of the magnitude of this response may be overstated. There are multiple channels at play, and predictions of a large response in savings do not account for general equilibrium effects.
As China relaxes its draconian fertility laws, a key question for policymakers is how the resulting increase in fertility will affect economic performance – in particular, whether it will lower household savings. This concern is motivated by the observation that China’s rapid rise in household savings rates coincided with a drastic reduction in fertility that began in the mid 1970s as a result of what came to be known as the one-child policy. During the 1990s, household savings rates reached highs of 34%.
Development Financial markets
China, personal saving, one-child policy, fertility
Conflict between US-led and China-led economic architecture
Pradumna B. Rana 05 August 2014
China’s frustration with the slow progress of IMF governance reform has contributed to the evolution of a China-led architecture that locks out the West – the latest examples being the New Development Bank and the Credit Reserve Arrangement established by the BRICS. This column argues that these institutions are not a threat to the IMF and the World Bank, but they complicate global economic governance. It is unlikely that Europe’s ‘troika’ model – where the IMF works jointly with regional financing facilities – will be possible in Asia. We perhaps need a New Bretton Woods.
The Bretton Woods agreement – which is 70 years old this month – established three institutions to promote law and order in international economic relations:
- The IMF to promote macroeconomic stability,
- The GATT (and its successor, the WTO) to ensure an open trading environment, and
- The World Bank to provide development finance for poverty reduction.
The smooth operation of this rules-based, US-led global economic architecture contributed to the unprecedented economic growth and worldwide prosperity of the post-WWII period.
US, China, IMF, global governance, World Bank, multilateralisation, troika
Agglomeration and product innovation in China
Hongyong Zhang 21 July 2014
The Chinese government has been actively promoting innovation via policies such as R&D subsidies, tax relief, and location policies. Since 1995, central and local governments have established more than 100 clusters in over 60 cities. This column presents new evidence on the effect of the concentration of firms on product innovation (new products) in the manufacturing industries.
Spatial agglomeration of economic activities is generally assumed to improve productivity and spur firms’ innovation through localisation economies and urbanisation economies.1 There is an extensive empirical literature investigating the effects of localisation and urbanisation on firm-level productivity. Despite its economic importance, there are few empirical studies focusing on agglomeration and product innovation. Feldman and Audretsch (1999) and De Beule and Van Beveren (2010) are two of the few exceptions.
Productivity and Innovation
R&D, productivity, China, spatial concentration, innovation, subsidies, clusters, agglomeration
The Chinese labour market: High unemployment coexisting with a labour shortage
Yang Liu 19 July 2014
In China, both unemployment and a labour shortage have emerged as problems in recent years. This column explains their co-existence by a decrease in the matching efficiency in the labour market. One way to improve the matching efficiency, though difficult to implement in the short-run, is through the creation of more employment agencies. Companies can benefit if they invest more in recruiting activities.
In China, both a labour shortage and unemployment have emerged as problems in recent years. The number of university students scheduled to graduate in June 2014 is 7.27 million, increasing with 280,000 from 2013 (MHRSS 2014). Following 2013 – at the time considered the most difficult year for job seekers in history – 2014 is expected to be even harsher. Problems in the labour market in China, which is a key region for Japanese companies advancing overseas, are also attracting attention in Japan.
China, unemployment, labour shortage
Through the looking glass: CEO pay in China's listed companies
Alex Bryson, John Forth, Minghai Zhou 24 June 2014
Publicly traded companies are the engine behind China’s growth, which raises the question of how CEO compensation works under an interventionist state. This column presents an analysis of executive compensation in China and a comparison to the West. Chinese listed firms have incentive structures similar to those of the US; in this case, effective compensation policies seem to transcend political boundaries.
For many in the West China remains a paradox: a single-party Communist state with a vibrant, thriving economy set to challenge the US in the coming decade. Some have questioned the sustainability of the Chinese growth miracle in the absence of fully-fledged democracy and root-and-branch market reforms. But others point to state-sponsored decentralised market reforms over the past three decades as the key to China's success (Xu 2012).
Financial markets Labour markets
China, executive pay, corporate governance, Executive compensation, CEOs
Do capital controls deflect capital flows?
Paolo Giordani, Michele Ruta, Hans Weisfeld, Ling Zhu 23 June 2014
Capital controls may help countries limit large and volatile capital inflows, but they may also have spillover effects on other countries. This column discusses recent research showing that inflow restrictions have significant spillover effects as they deflect capital flows to countries with similar economic characteristics.
The size and volatility of capital flows to developing countries have increased significantly in recent years (Figure 1), leading many economists to argue that national policies and multilateral institutions are needed to govern these flows (Forbes and Klein 2013, Blanchard and Ostry 2012). The IMF itself has reviewed its position on the liberalisation and management of capital flows, while recognising that “much further work remains to be done to improve policy coordination in the financial sector” (IMF 2012, p. 28).
China, capital flows, spillovers, South Africa, capital controls, Brazil, Capital inflows, international capital flows
Curriculum and ideology
Davide Cantoni, Yuyu Chen, David Y. Yang, Noam Yuchtman, Y. Jane Zhang 29 May 2014
Schooling changes are associated with ideological ones but it is difficult to claim a causal relationship. This column attempts to analyse the causal effect of curriculum changes in China on shaping preferences of students. The new curriculum moves one’s belief about democracy by about 25% of a standard deviation in the direction desired by the government. The findings suggest the state can use education to promote socially-useful beliefs and cultivate good citizenship.
Education shapes young minds. Contemporary debates rage on whether it also shapes people’s political views, attitudes, and their values. Examples range from teaching of evolution in US schools, to the role of madrassas in the Islamic world, and the coverage of World War II in Japanese history textbooks. In 2012, an attempt to introduce a mainland Chinese curriculum into Hong Kong schools led to tens of thousands of people taking to the streets in protest.
Scholars across the social sciences have argued that schools play an important role in shaping political attitudes:
education, China, curriculum reform
Why are savings so high among the young in urban China?
Mark R. Rosenzweig, Junsen Zhang 21 May 2014
Household savings in China are high by international standards, and the young save as much or more than the middle-aged – a fact at odds with the standard life-cycle savings model. This column argues that neither old-age support by the middle-aged nor the one-child policy can satisfactorily explain this phenomenon. Rather, currently high housing costs and the prevalence of inter-generational shared housing are key reasons for the higher savings rates of the urban young in China.
A well-known phenomenon in contemporary China is the high personal savings rates of households compared with those in developed countries and many low-income countries. A less-studied aspect of this is the elevated savings rates of the young relative to the middle-aged, first shown by Chamon and Prasad (2010) based on urban household data covering the years 1986–2005 for ten provinces.
Frontiers of economic research Global economy
China, housing, family, savings, one-child policy