TY - JOUR
T1 - A fire sale without fire
T2 - An explanation of labor-intensive FDI in China
AU - Huang, Yasheng
AU - Ma, Yue
AU - Yang, Zhi
AU - Zhang, Yifan
PY - 2016/11
Y1 - 2016/11
N2 - China's labor-intensive industries are characterized by low technology and high competition. The massive inflow of FDI in China's labor intensive industries is inconsistent with the conventional wisdom that FDI should be more prevalent in technology-intensive and low competition industries. To explain this puzzle, we offer a “fire sale” hypothesis: facing severe financial constraints, Chinese private firms give up their equity to form joint ventures with foreign firms in order to obtain financing. Using the garment industry as an example, we find that among domestic firms, the financial constraint index is highest for private firms and lowest for state-owned firms. We further estimate a probit model of joint-venture decisions by private firms. Our results suggest that those private firms with greater financial constraints are more likely to seek foreign joint ownership. The effect of financial constraints on joint venture decision is both statistically and economically significant.
AB - China's labor-intensive industries are characterized by low technology and high competition. The massive inflow of FDI in China's labor intensive industries is inconsistent with the conventional wisdom that FDI should be more prevalent in technology-intensive and low competition industries. To explain this puzzle, we offer a “fire sale” hypothesis: facing severe financial constraints, Chinese private firms give up their equity to form joint ventures with foreign firms in order to obtain financing. Using the garment industry as an example, we find that among domestic firms, the financial constraint index is highest for private firms and lowest for state-owned firms. We further estimate a probit model of joint-venture decisions by private firms. Our results suggest that those private firms with greater financial constraints are more likely to seek foreign joint ownership. The effect of financial constraints on joint venture decision is both statistically and economically significant.
KW - China
KW - FDI
KW - Financial constraints
UR - http://www.scopus.com/inward/record.url?scp=84966605301&partnerID=8YFLogxK
UR - https://www.scopus.com/record/pubmetrics.uri?eid=2-s2.0-84966605301&origin=recordpage
U2 - 10.1016/j.jce.2016.04.007
DO - 10.1016/j.jce.2016.04.007
M3 - RGC 21 - Publication in refereed journal
SN - 0147-5967
VL - 44
SP - 884
EP - 901
JO - Journal of Comparative Economics
JF - Journal of Comparative Economics
IS - 4
ER -
