Restrictions on Foreign Investments and the Relocation of Firms

Abstract

We analyse why the Chinese government sets restrictions on foreign direct investment (FDI). We focus our analysis on the percentage of shares in relocated firms that the government allows to be foreign-owned. The government's decision on this percentage depends on the entry cost, the number of firms that relocate and the weight of the consumer surplus in the objective function of the government. We show that by its choice of this percentage, the Chinese government may restrict or encourage FDI to its country. We also find that if the government may subsidise the fixed entry cost, it provides a subsidy only when the producer surplus has a greater weight than the consumer surplus in weighted welfare. In that case, the subsidy encourages relocation by both firms and permits the government to allow a lower percentage of shares to be foreign-owned in relocated firms.

Dynamic spatial effects of determinants of foreign direct investment: A case of the southern key economic region of Vietnam

“…At the same time, resources such as raw materials, labour force, land and other inputs are one of the important strategic considerations of MNCs (Erdogan & Unver, 2015; Kang & Jiang, 2012; Shah & Ameer, 2021). Therefore, the decision of a MNC to relocate production depends on its ability to reduce production costs and gain market share to increase its revenue (Dong et al, 2015). It means that FDI is formed by differences in production factors prices, especially labour cost differences (Gamboa, 2012).…”

“…FDI enhances tax revenues to develop infrastructure and human capital for the development of industries (Paul & Jadhav, 2019; Shah & Ameer, 2021). It also aims to promote economic growth in host countries by increasing capital, creating jobs, and easing technology transfer (Dong, Bárcena‐Ruiz, & Garzón, 2015; Kumari & Sharma, 2017; Silajdzic & Mehic, 2015). In general, FDI inflows into the economy increase aggregate demand, which in turn promote growth.…”

Why Do Mandated International Joint Ventures Still Exist?

“…It has been shown that removing LERs can be welfare enhancing in a small open economy (Chao and Yu 1996), because of the reduction of moral hazards due to unobservable inputs (Das and Katayama 2003), or through the achievement of an optimal growth rate in a developing country (Morita, Takatsuka, and Yamamoto 2015). On the other hand, it has also been shown that stricter LERs can enhance economic efficiency when the market structure remains unaffected (Norbäck and Persson 2005), due to the existence of moral hazard with adverse selection (Karabay, Pulverer, and Weinmüller 2009), the nonexistence of domestic firms (Dong, Bárcena‐Ruiz, and Garzón 2015), or the vertical structure of a foreign firm (Chakrabarti and Heywood 2004). It has also been argued that by forcing IJVs, a host government can alleviate informational constraints (Karabay 2010) or promote technology spillovers by inducing technology transfer (Mattoo, Olarreaga, and Saggi 2004).…”

“…improves) welfare in the long run. However, it should be noted that previous studies largely examine a domestic market consisting of profit‐maximizing private firms (with the exception of Dong, Bárcena‐Ruiz, and Garzón 2015). To the best of our knowledge, no analysis has examined LERs in host markets formerly dominated by public firms, which can be widely observed in most transition and developing economies 10 .…”