Foreign direct investment and product quality in host economies

Anwar, Sajid, and Sun, Sizhong (2023) Foreign direct investment and product quality in host economies. The World Economy, 46 (5). pp. 1290-1318.

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Abstract

We examine, both theoretically and empirically, how the presence of FDI affects product quality of domestic firms through worker mobility. Mobility of more productive workers from foreign-invested to domestic firms lowers the cost of production and contributes to improvement in the quality of goods produced by domestic firms. Profit maximisation by firms yields a structural relationship between unobserved product quality and observed revenue, which allows us to identify the impact of FDI on product quality. We use the theoretical model to frame empirical estimation, where we propose a novel approach to correct for sample selection bias. Under some mild assumptions, a set of population moments are derived and estimated using firm-level data from China's beverage manufacturing industry. We find that, on average, (i) working for foreign-invested firms boosts the skill level of workers by 11.12 per cent and (ii) the probability that an FDI-trained worker will move to a domestic firm is approximately 0.3. Estimation of the structural parameters shows that a one per cent increase in FDI leads to approximately 1.4 per cent improvement in product quality of domestic firms in China's beverage manufacturing industry.

Item ID: 75872
Item Type: Article (Research - C1)
ISSN: 1467-9701
Keywords: China, FDI, monopolistic competition, product quality, spillovers
Copyright Information: © 2022 The Authors. The World Economy published by John Wiley & Sons Ltd. This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
Research Data: https://data.mendeley.com/datasets/jwg5y9xmvw/1
Date Deposited: 31 Aug 2022 07:57
FoR Codes: 38 ECONOMICS > 3801 Applied economics > 380110 International economics @ 50%
38 ECONOMICS > 3801 Applied economics > 380109 Industry economics and industrial organisation @ 50%
SEO Codes: 15 ECONOMIC FRAMEWORK > 1505 Microeconomics > 150510 Production @ 100%
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