A multiregional CGE analysis of FDI and production networks in China
The Chinese share of world FDI inflows rose from 2.8% in 1991 to 8.1% in 2011. East Asian economies have provided 63% of the cumulative FDI. More than 70% of intraregional trade in East Asia is in parts and components to be further assembled and exported to other regions (ADB, 2007). The emergence of China has led to a triangular trade pattern among China, advanced Asian economies, the U.S. and Europe.
Indeed, FDI seems to play a big role in China, as well as, in reshaping the production networks among the Asian economies and in the subsequent impact for other big world economies.
Data/Methods
A general equilibrium analysis seems appropriate to grasp the effects of FDI from a detailed perspective including both supply and demand side and to resemble micro and macro variables like GDP, National income, employment, welfare, output, imports and exports, in a consistent manner.
We use a two-factor, fifteen-sector and six region (China-East Asia-U.S.-Japan-Europe-ROW) version of the computable general equilibrium model due to Hertel (1997), based on the GTAP8 database. The shock consists of a simultaneous increase in the capital stock of the sectors of Electronics, Machinery, Chemicals and Textiles in China, which account for around 62% of Chinese aggregate exports, while the capital stock in the rest sectors and regions remaining fixed.
Results:
In general, FDI inflows have benefited China in terms of GDP and national income, while having a rather small impact on the aggregate variables of the rest of regions. From a sectoral perspective, China enlarges both exports and imports of Chemicals, Electronics and Machinery goods. The two former sectors have a similar trade pattern, mostly attributable to their high intensity of imported intermediate inputs. Machinery is more dependent on domestic intermediates and, therefore, its trade patterns are slightly different. Contrasting with the three previous sectors, Textiles is very oriented to private consumption, so after the shock it enlarges its imports and reduces its exports to satisfy the Chinese rising domestic demand. East Asia benefits most from the increased exports to China, since it provides the majority of Chinese imports. By contrast, exports from the rest of regions are crowded out from the world market when China increases its exports, with the only exceptions of European exports in Chemicals. The regions different to China and East Asia, play more the role of final markets, absorbing the majority of increased Chinese exports.
JEL Codes: C68, F15, F17