Behzad Azarhoushang and Jennifer Pédussel Wu

The effect of FDI on industry value-added: Evidence from China

22 pages · 3.64 EUR
(September 2016)

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Introduction:

Since the 1990s, trade in intermediate goods and raw materials between Multi- National Companies (MNCs), their subsidiaries, and international subcontractors increased sharply and currently dominates world trade. In 2013, trade in the Global Value Chain (GVC) accounted for 80 percent of global trade. The revolution in Information and Communication Technology (ICT) due to innovative technology and decreasing trade costs encouraged MNCs to fragment production and outsource various stages to countries with lower factor costs.

Opening subsidiaries in host countries via Foreign Direct Investment (FDI) is one method of outsourcing production stages and the amount of FDI has increased significantly in the past three decades, surpassing international trade in goods and services since the 1990s. According to UNCTAD (2013), the nominal stock of inward FDI tripled from 1980 to 2012. The patterns of international trade are clearly dependent on government interventions and FDI is no different. In addition, FDI has possible direct and indirect positive impacts on manufacturing value-added via technology spillovers and the creation of new employment opportunities. While various factors increase the positive effects of MNCs on the host country, the government policy of host countries is therefore one of the most important factors for directing FDI into constructive directions.