Heterogeneous Impacts of a Change in Chinese FDI Regulations on Domestic Market Outcomes: Empirical Evidence from Taiwanese Plant Data

Abstract

The domestic market outcomes of firms investing abroad have attracted the attention of both economists and policymakers. In particular, accelerating the relocation of domestic production abroad has raised public concern about the hollowing out of domestic technologies and employment. This study investigates the impact of foreign direct investment (FDI) policies toward China on plant productivity and employment, using Taiwanese manufacturing plant-level data and exploiting an FDI regulation change in China in 2002 as a significant variation. Our difference-in-differences estimates reveal the heterogeneous responses of Taiwanese plants to this regulation change: plants in deregulated industries that newly invested in China after 2000 experienced an increase in their productivity, employment, and sales, while plants in those industries that had already invested in China in 2000 decreased both employment and sales. We do not find any differential trends between plants in deregulated industries and those in other industries before the regulation change. We also check our crucial assumption of whether the regulation change expanded Taiwanese firms' activities in China. We find that the regulation change increased the capital inflows and net sales generated by new entrant subsidiaries in the Chinese market. Furthermore, we do not find statistical evidence of the hollowing out effects on domestic market outcomes in deregulated industries.