The relationship between the Chinese "going out" strategy and international trade

Abeliansky, Ana Lucia; Martínez-Zarzoso, Inmaculada Working Paper The relationship between the Chinese "going out" strategy and international trade Economics Discussion Papers, No. 2018-20 Provided in Cooperation with: Kiel Institute for the World Economy – Leibniz Center for Research on Global Economic Challenges Suggested Citation: Abeliansky, Ana Lucia; Martínez-Zarzoso, Inmaculada (2018) : The relationship between the Chinese "going out" strategy and international trade, Economics Discussion Papers, No. 2018-20, Kiel Institute for the World Economy (IfW), Kiel This Version is available at: https://hdl.handle.net/10419/174899 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Licensed under the Creative Commons License - Attribution 4.0 International (CC BY 4.0) Discussion Paper No. 2018-20 | February 19, 2018 | http://www.economics-ejournal.org/economics/discussionpapers/2018-20 The relationship between the Chinese ‘going out’ strategy and international trade Ana Lucia Abeliansky and Inmaculada Martínez-Zarzoso Abstract This study is the first to estimate a system of simultaneous gravity equations for Chinese exports, imports and foreign direct investment (FDI) using a sample of 167 countries over the period 2003–2012. The main results indicate that trade and outward FDI are complementary. In particular, the authors show that outward Chinese FDI is related to higher exports and imports and that China trades more with countries hosting Chinese FDI. Results are also robust to the use of instrumental variables. Therefore, the popular claim that Chinese investment could be detrimental for developing countries is not supported by the data. (Published in Special Issue FDI and Multinational Corporations) JEL F14 F21 F59 Keywords International trade; foreign direct investment; China Authors Ana Lucia Abeliansky, University of Goettingen, Germany Inmaculada Martínez-Zarzoso, Department of Economics, University of Göttingen, Germany, and Institute of International Economics, Universitat Jaume I, Castellón, Spain, [email protected] Citation Ana Lucia Abeliansky and Inmaculada Martínez-Zarzoso (2018). The relationship between the Chinese ‘going out’ strategy and international trade. Economics Discussion Papers, No 2018-20, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-20 2 1. Introduction During the late 1990s, China started its "going out" strategy with an intense program of outward foreign direct investment (FDI). According to UNCTAD statistics, Chinese outward FDI stock was about 33 billion USD in 2003, reaching almost 614 billion in 2013, which translates into a 30 percent annual growth rate. A timely question is whether this increase is related to Chinese exports and imports, in line with the idea that trade and FDI could be complements. Recent investment agreements with China have raised concerns in the partner economies alleging that China's intention was to extract natural resources and could in turn force the host countries to re-orient their production to low value added products and extraction of natural resources (Economist, 2013). However, recent trade figures show that China has been increasingly investing in manufacturing activities and has gradually abandoned its focus on the extraction and mining sectors. Meanwhile, given the close connections of the Chinese (business) community, it is to be expected that Chinese investment will generate an increase in demand –and in turn of imported products– mainly of intermediate inputs, high-tech goods and machinery needed to produce final manufacturing products in the host countries. Considering the deep connections between the Chinese ethnicity and business (Rauch and Trinidade, 2002), Chinese exporters could profit from this increase in demand . Moreover, contrary to the traditional economic theory assuming that trade and FDI are substitutes (Mundell, 1957), Schmitz and Helmberger (1970), among others, have theoretically shown that trade and FDI could be complements under certain assumptions. Also the bulk of empirical evidence in regions worldwide points to the complementarity effects between FDI and exports (Brouwer et al. 2008; Egger, 2001; Chen et al. 2012; Cheung and Qian, 2009). 3 This paper departs from earlier literature in two main regards. Firstly, it investigates the trade-FDI link for the Chinese case in recent years, paying particular attention to the characteristics of the destination countries, to the presence of zeroes and to simultaneity issues. Secondly, it focuses on the effect of FDI not only on total exports, but also on Chinese imports. In particular, we estimate a gravity model of trade augmented with FDI and a model of FDI augmented with trade to investigate reverse causality issues. We consider exports and imports separately and test two main hypotheses. On the one hand, we hypothesize that China exports more to destinations where it is active in FDI. On the other hand, we expect that higher levels of FDI are associated with higher Chinese exports and imports. The main results support both hypotheses. More specifically, we find that China exports 20 percent more to destinations in which it is active in FDI and, in the long run, higher FDI flows are associated to increases in exports. The rest of the paper is structured as follows. Section presents a review of the closely related literature. Section 3 describes the data and presents some stylized facts. Section 4 specifies the model, shows and discusses the main results and presents some robustness checks. Finally Section 5 concludes. 2. Trade and FDI in the gravity model Gravity models have been considered the workhorse of international trade in the recent decades and are a widely accepted empirical tool (Head and Mayer, 2014). These models have also been used to estimate the determinants of bilateral FDI and some authors estimate FDI and trade models simultaneously. In particular, Brouwer et al (2008) estimated gravity models of trade and FDI separately for a sample of 28 European countries over the period 1990 to 2004 and find a positive and significant correlation between bilateral FDI and bilateral trade, when FDI is included as explanatory variable in the gravity model of trade. However, the authors do not tackle the problems 4 related to missing data in FDI (around 50 percent), endogeneity of the FDI variable or reverse causality. In contrast to these authors, Egger (2001) estimated a system of simultaneous equations for trade and FDI using intra-EU bilateral flows from 1988 to 1996, allowing for the endogeneity of both exports and FDI variables in the system. He finds that, in line with the theoretical models of Helpman (1984) and Markusen and Maskus (1999), bilateral exports are an increasing function of outward FDI stocks. However, the effect is only statistically significant in the long run. Chen et al (2012) analyzed the relationship between outward FDI and exports of 15 Taiwanese manufacturing industries over the period from 1991 to 2007. The main results, obtained using random and fixed effects estimators, show the existence of complementarity between FDI and exports. Most of the abovementioned studies use lagged FDI values to control for the endogeneity of FDI in the trade equation, whereas lagged exports are used in the FDI equation. The reverse causality issue is also considered in Cheung and Qian (2009) who analyze the effect of Chinese exports as a determinant of Chinese outward FDI also using the lagged value of exports to mitigate the endogeneity problem. They find that this relationship is positive and gets stronger when the host economies are developing countries. Also focusing on China, Caporale et al (2015) analyzed China’s trade with North America, Asia and Europe and its relationship with inward FDI. They found a positive relationship, stronger for the period after China joined the WTO. Their main concern is the endogeneity due to time-invariant variables, but they fail to account for the reverse causality problem that could arise by the inclusion of FDI in this setting. We differ from this study given that we focus on the outward FDI and how it correlates with exports, and imports, plus employing econometric methods that aim to consider the correlation of the determinants of the different variables, and simultaneity issues. Moreover, we include all available countries for which there is data, regardless of the continent they belong to. A second paper focused on China’s trade is Yang and Martinez-Zarzoso (2014), which assessed the effect of the ASEAN-China trade agreement on sectoral trade. The authors found mainly net trade creation effects, but did not considered FDI as a control variable in their gravity model focusing exclusively on trade flows. 5 Some recent studies use firm level data to investigate the relationship between FDI and trade in Africa. In particular, Broadman (2007) using firm level data World Bank Africa Asia Trade Investment (WBAATI) survey and the World Bank’s newly developed business case studies of Chinese firms in Africa, find that there are positive links between FDI and trade among Chinese firms involved in Africa. In particular, the attraction of investment for infrastructure and related services development seems to create “spillovers” on the continent. Moreover intangible assets, such as technology transfer and transfer of managerial skills, which usually accompany FDI, also act as vehicles stimulating trade. Similar evidence is shown in Chen and Tang (2014). Applying propensity score matching techniques to compare firms that have similar characteristics ex-ante, the authors show that Chinese firms engaged in outward FDI export 0.6 log points more than firms that do not invest abroad. These results show that horizontal FDI from China complements firms’ trade, consistent with the idea that exporting entails high fixed costs and that FDI helps reduce those fixed costs. 3. Data and Stylized Facts We use bilateral FDI data from UNCTAD, trade data from COMTRADE and gravity variables, namely distance between the capital cities (lnDist), colonial relationship (Colony), common legal origin (Comleg), and common language that is spoken by at least 9% of the population (Comlang) from CEPII. GDPs and population are from the WDI, while the regional trade agreement (RTA) dummy is from De Sousa (2012)1. The bilateral investment treaty dummy variable (BIT) is created with information obtained from UNCTAD. We use BIT ratification instead of BIT signature since the relevant date is the one in which the agreement enters into force; the same applies for the RTA variable. The sample includes 167 partner countries and cover the years from 2003 to 2012. Summary statistics for all the variables included in the analysis are shown in Table 1. 1http://jdesousa.univ.free.fr/data.htm. 6 Table 1. Summary Statistics Variable mean p50 sd min max N Ln Exports 20.195 20.269 2.418 11.992 26.588 1648 Ln Imports 18.593 18.955 9.969 0 25.994 1648 Ln GDP 24.048 23.812 2.293 18.434 30.414 1648 Ln Population 15.782 15.920 1.849 9.905 20.936 1648 Ln Distance 9.031 9.076 0.493 7.063 9.858 1648 Ln FDI Stock 3.769 3.898 2.221 -0.693 9.746 1262 RTA 0.055 0 0.228 0 1 1648 Common Colony 0.006 0 0.077 0 1 1648 Common Legal System 0.176 0 0.381 0 1 1648 Common Language 0.012 0 0.110 0 1 1648 BIT 0.556 1 0.497 0 1 1648 Note: RTA denotes regional trade agreement and BIT bilateral investment agreement. Graphical inspection of the data shows that Chinese exports are significantly higher in destinations where China is also engaged in FDI (Figure 1) and Chinese outward FDI is positively correlated with Chinese exports (Figure 2), the same applies to imports (Figure 3 and Figure 4). Figure 1.Chinese Exports by FDI status 18 19 20 21 22 2002 2004 2006 2008 2010 2012 Year Log of Exports (OFDI) Log of Exports (no OFDI) 7 Figure 2.Chinese Exports and FDI Figure 3.Chinese Imports by FDI status 10 15 20 25 30 Log of exports 0 2 4 6 8 10 Log of outward FDI 14 16 18 20 2002 2004 2006 2008 2010 2012 Year Log of Imports (OFDI) Log of Imports (no OFDI) 8 Figure 4.Chinese Imports and FDI 4. Model specification and estimation results 4.1 Model Specification We estimate a system of seemly-unrelated gravity equations in which FDI, exports and imports are the endogenous variables and enter with one lag as explanatory variables. The model is specified as follows: (1) (2) (3) where j denotes the partner country and t the year. and are time dummies, while and are regional dummies. Regional dummies account for multilateral resistance factors and the time dummies account for common trends in Chinese exports, imports and FDI. Given the existence of 0 5 10 15 20 25 Log of imports 0 2 4 6 8 10 Log of outward FDI 15 BITjt 0.597* 0.424 (0.342) (0.271) Observations 1,481 1,485 1,481 167 167 167 R-squared 0.865 0.817 0.644 0.863 0.817 0.629 Continent FE YES YES YES YES YES YES Partner ALL ALL ALL ALL ALL ALL Standard errors in parentheses. Columns (1) to (3) have robust (jack-knife) standard errors.*** p<0.01, ** p<0.05, * p<0.1. Columns (1) to (3) are the results of running a between estimator and columns (4) to (6) from running a SUR regressions but using time-averages of the variables of interest. The default for the continental dummies is Africa. 5. Conclusions In the 2000s, China has been actively investing abroad, becoming the third largest investor in the world. Many have challenged the benefits of the Chinese investments in the local economies. Using a system of seemly unrelated gravity equations for exports, imports and FDI we show that FDI appears to be complementary to Chinese exports and imports. These results are also robust to an instrumental variable approach. Chinese FDI is not that bad after all - despite being correlated to higher imports from China, it is also associated to higher exports to China. Future work entails the analysis of different product groups to investigate the potential heterogeneity of the relationships. 16 References Broadman, H.G. (2007) Africa’s silk road: China and India’s new economic frontier. The World Bank, Washington DC. Brouwer, J., Paap, R. and J. Viaene (2008), "The trade and FDI effects of EMU enlargement", Journal of International Money and Finance, 27, 188-208. Caporale, G. 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(1984), "A simple theory of International Trade and with Multinational Corporations", Journal of Political Economy, 92(3), 451-471. Johnston, L. A., Morgan, S. L. and Wang, Y. (2015), “The Gravity of China’s African Export Promise”, The World Economy doi: 10.1111/twec.12229. Markusen, J.R. and K.E. Maskus (1999), "Multinational Firms: Reconciliating theory and Evidence", NBER Working Paper 7163, NBER, Cambridge Massachusetts. Martínez-Zarzoso, I., Nowak-Lehman D., F. and Klasen, S. (2017) “Aid and its Impact on the Donor’s Export Industry –The Dutch Case”, European Journal of Development Research 29 (4), 769-786. Mundell, R. (1957),"International Trade and Factor Mobility", American Economic Review, 47, 321- 335. Rauch, J. and V. Trindade (2002)," Ethnic Chinese Networks in International Trade", The Review of Economics and Statistics, 84(1): 116–130. Schmitz, A. and P. Helmberger (1970), "Factor mobility and international trade: the case of complementarity", The American Economic Review, 60(4), 761-767. 17 Stern, D. (2010), “Between estimates of the emissions-income elasticity” Ecological Economics 69 (11), 2173-2182. Wagner, D. (2003). ‘Aid and Trade: An Empirical Study’, Journal of the Japanese and International Economies 17, 153-173. Yang, S. and Martínez-Zarzoso, I. (2014), “A Panel Data Analysis of Trade Creation and Trade Diversion Effects: The case of ASEAN-China Free Trade Area” China Economic Review 29,138-151. 18 Appendix Table 5. List of Countries Afghanistan Canada Gambia Kuwait Niger Sri Lanka Albania Cape Verde Georgia Kyrgyzstan Nigeria Suriname Algeria Central African Republic Germany Laos Norway Swaziland Angola Chad Ghana Latvia Oman Sweden Antigua and Barbuda Chile Greece Lebanon Pakistan Switzerland Argentina Colombia Grenada Lesotho Palau Tajikistan Armenia Comoros Guatemala Liberia Panama Tanzania Australia Congo Guinea Libya Papua New Guinea Thailand Austria Congo, Democratic Republic Guinea- Bissau Lithuania Paraguay Togo Azerbaijan Costa Rica Guyana Luxembourg Peru Tonga Bahamas Croatia Haiti Madagascar Philippines Trinidad and Tobago Bahrain Cyprus Honduras Malawi Poland Tunisia Bangladesh Czech Republic Hungary Malaysia Portugal Turkey Belarus Denmark Iceland Maldives Qatar Turkmenistan Belgium Djibouti India Mali Romania Uganda Belize Dominica Indonesia Malta Russian Federation Ukraine Benin Dominican Republic Iran Mauritania Rwanda United Arab Emirates Bhutan Ecuador Ireland Mauritius Samoa United Kingdom Bolivia Egypt Israel Mexico Sao Tome and Principe United States Bosnia and Herzegovina El Salvador Italy Moldova Saudi Arabia Uruguay Botswana Equatorial Guinea Ivory Coast Mongolia Senegal Uzbekistan Brazil Eritrea Jamaica Morocco Seychelles Vanuatu Brunei Estonia Japan Mozambique Sierra Leone Venezuela Bulgaria Ethiopia Jordan Namibia Singapore Vietnam Burkina Fiji Kazakhstan Nepal Slovakia Yemen Burundi Finland Kenya Netherlands Slovenia Zambia Cambodia France Kiribati New Zealand South Africa Zimbabwe Cameroon Gabon Korea, South Nicaragua Spain Please note: You are most sincerely encouraged to participate in the open assessment of this discussion paper. 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