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Foreignization and Innovation: Insights from Heterogenous Supply Chains
Get PDFapplication/pdfIDP000938_001China has been shifting from foreignization to domestication, especially since recent years, resulting in a decrease in foreignization dividend. This paper diverges from the majority of existing literature on the innovation impact of foreign direct investment or foreign ownership by focusing on supply chains. We employ unique input-output tables to discern the nuanced effects of foreignization across heterogenous supply chains, and find that: (1) Foreignization both within the target firms and of the upstream firms associates with an enhancement in innovation, as measured by quality-adjusted patent counts. (2) while OF (Other foreign) shareholdings do possess advantages over HMT (Hong Kong, Macau, and Taiwan) shareholdings in terms of providing high-quality intermediate goods, HMT shareholdings are more friendly in engaging in innovation activities in China, compared to the OF shareholdings. (3) While foreignization in DOEs (domestically-owned enterprises) have negative impact on innovation, that in FOEs (foreign-owned enterprises) have positive impact on innovation. (4) Intellectual property institutions perform better than patent subsidy policies in foster innovation, especially through supply chains. These findings shed new light on the specific role of foreignization in promoting innovation and provide valuable policy implications to address the challenges of domestication.technical repor
Industrial Subsidies along Domestic Value Chains and their Impacts on China’s Exports
Get PDFapplication/pdfIDP000937_001Industrial subsidies are at the center of the recent political and economic debate. This paper examines the impacts of subsidies along domestic value chains on the export performance of Chinese firms. Using firm-level subsidy data and inter-provincial input-output tables with firm ownerships, we measure direct subsidies and indirect subsidies in upstream industries. Our findings reveal several vital points: (1) Direct subsidies significantly enhance Chinese firms’ export participation and volume. These subsidies are positively associated with firm investment and R&D expenditure. (2) Surprisingly, upstream indirect subsidies—particularly those from 1st tier upstream industries—have even larger effects on Chinese exports than direct subsidies. These upstream subsidies contribute significantly to export growth. (3) Both domestic firms and foreign-invested enterprises benefit from direct subsidies, but the effect of upstream subsidies varies by firm ownership. (4) Both direct and indirect subsidies are associated with higher export prices and product quality, leading to a lower quality-adjusted price. These export growth and quality upgrading are driven by direct subsidies through increased investment and R&D, and indirect subsidies through intermediate inputs. These results suggest that government support may promote quality upgrading and enhance the global competitiveness of Chinese exports. This paper contributes to the ongoing debate on government subsidy and industrial policies by shedding light on the intricate relationship between subsidies and exports in the context of evolving global value chains.technical repor
