Outward FDI and domestic input distortions: evidence from Chinese Firms

Transcription

1 Title Outward FDI and domestic input distortions: evidence from Chinese Firms Author(s) Chen, C; Tian, W; Yu, M Citation The Asian Development Bank Inaugural Conference on Economic Development (ADB-ACED 2016), The University of Hong Kong, Hong Kong, China, 2-3 June Issued Date 2016 URL Rights This work is licensed under a Creative Commons Attribution- NonCommercial-NoDerivatives 4.0 International License.

2 Outward FDI and Domestic Input Distortion: Evidence from Chinese Firms Cheng Chen, Wei Tian and Miaojie Yu SEF of HKU; SITE of UIBE; CCER and NSD of PKU (Chen, Tian and Yu) Outward FDI and Distortion 1 / 38

3 Introduction Motivation: Outward FDI from Developing Countries Outward foreign direct investment (outward FDI) from developing countries is increasing at a high speed (UNCTAD World Investment Report (2015)): In 2014, MNCs from developing economies invested almost 468 billion USD abroad, a 23 per cent increase from the previous year. (Chen, Tian and Yu) Outward FDI and Distortion 2 / 38

4 Introduction Motivation: Outward FDI from Developing Countries Outward foreign direct investment (outward FDI) from developing countries is increasing at a high speed (UNCTAD World Investment Report (2015)): In 2014, MNCs from developing economies invested almost 468 billion USD abroad, a 23 per cent increase from the previous year. Developing and transition economies represent 9 of the 20 largest investor economies globally. Developing economies now account for more than one third of global FDI outows, up from 13 per cent in (Chen, Tian and Yu) Outward FDI and Distortion 2 / 38

5 Introduction Chinese Firms' Going Globe China has seen an astonishing increase in its outward FDI ows in the past decade. China's outward FDI ows: 6.5% of the world's FDI ows in China's outward FDI ows have increased by 37.8 times in the past ten years, while GDP and trade volume of FDI have only increased by less than fourfold. (Chen, Tian and Yu) Outward FDI and Distortion 3 / 38

6 Introduction Chinese Firms' Going Globe China has seen an astonishing increase in its outward FDI ows in the past decade. China's outward FDI ows: 6.5% of the world's FDI ows in China's outward FDI ows have increased by 37.8 times in the past ten years, while GDP and trade volume of FDI have only increased by less than fourfold. China's outward FDI ows (140 billion USD) surpassed its inward FDI ows (119 billion USD) in (Chen, Tian and Yu) Outward FDI and Distortion 3 / 38

7 Introduction Distortion and Misallocation in China We investigate investment and production strategies of Chinese MNCs and patterns of China's outward FDI through the lens of domestic distortions. (Chen, Tian and Yu) Outward FDI and Distortion 4 / 38

8 Introduction Distortion and Misallocation in China We investigate investment and production strategies of Chinese MNCs and patterns of China's outward FDI through the lens of domestic distortions. Discriminations against private rms are a fundamental issue for Chinese economy. 1 Higher nancing cost: Dollar-Wei (2007); Song, Storesletten & Zilibotti (2011); Khandelwal, Schott & Wei (2013); Feenstra, Li & Yu (2014), Manova, Wei & Zhang(2015). (Chen, Tian and Yu) Outward FDI and Distortion 4 / 38

9 Introduction Distortion and Misallocation in China We investigate investment and production strategies of Chinese MNCs and patterns of China's outward FDI through the lens of domestic distortions. Discriminations against private rms are a fundamental issue for Chinese economy. 1 Higher nancing cost: Dollar-Wei (2007); Song, Storesletten & Zilibotti (2011); Khandelwal, Schott & Wei (2013); Feenstra, Li & Yu (2014), Manova, Wei & Zhang(2015). 2 Constrained in the exporting market: Bai, Krishna & Ma (2013), Bai, Hsieh & Song (2015), Khandelwal, Schott & Wei (2013). 3 Higher cost of acquiring land: Tian, Sheng & Zhang (2015). (Chen, Tian and Yu) Outward FDI and Distortion 4 / 38

10 Introduction Stylized Facts 1 Although non-fdi private rms are more productive than non-fdi SOEs on average, private FDI rms are less productive than state-owned FDI rms on average (productivity premium for state-owned MNCs). Puzzling, since it is well known that SOE are less productive than private rms in China. (Chen, Tian and Yu) Outward FDI and Distortion 5 / 38

11 Introduction Stylized Facts 1 Although non-fdi private rms are more productive than non-fdi SOEs on average, private FDI rms are less productive than state-owned FDI rms on average (productivity premium for state-owned MNCs). Puzzling, since it is well known that SOE are less productive than private rms in China. 2 Compared with private rms, SOEs are less likely to undertake outward FDI, and the fraction of outward FDI rms is smaller among SOEs. Puzzling, since SOEs are much bigger and receive supports from government for going abroad. (Chen, Tian and Yu) Outward FDI and Distortion 5 / 38

12 Introduction Main Results 1 Theory: Consider Helpman, Melitz and Yeaple (2004) (i.e., horizontal FDI) with two (possibly asymmetric) countries. Private rms pay higher input price when producing at home (wedge). (Chen, Tian and Yu) Outward FDI and Distortion 6 / 38

13 Introduction Main Results 1 Theory: Consider Helpman, Melitz and Yeaple (2004) (i.e., horizontal FDI) with two (possibly asymmetric) countries. Private rms pay higher input price when producing at home (wedge). 2 Institutional arbitrage: Extra benet for private rms to invest and produce abroad (alleviation of distortion). (Chen, Tian and Yu) Outward FDI and Distortion 6 / 38

14 Introduction Main Results 1 Theory: Consider Helpman, Melitz and Yeaple (2004) (i.e., horizontal FDI) with two (possibly asymmetric) countries. Private rms pay higher input price when producing at home (wedge). 2 Institutional arbitrage: Extra benet for private rms to invest and produce abroad (alleviation of distortion). 3 Selection reversal: For private rms (compared with SOEs): tougher selection in the domestic market and less stringent selection in the FDI market. (Chen, Tian and Yu) Outward FDI and Distortion 6 / 38

15 Introduction Related Literature 1 FDI and MNCs: Horizontal: Markusen (1984), Brainard (1997), Helpman, Melitz and Yeaple (2004); Vertical: Helpman (1984), Antràs (2003, 2005) and Antràs and Helpman (2004). (Chen, Tian and Yu) Outward FDI and Distortion 7 / 38

16 Introduction Related Literature 1 FDI and MNCs: Horizontal: Markusen (1984), Brainard (1997), Helpman, Melitz and Yeaple (2004); Vertical: Helpman (1984), Antràs (2003, 2005) and Antràs and Helpman (2004). 2 Distortion and Misallocation: Hsieh and Klenow (2009), Restuccia and Rogerson (2008); Midrigan and Xu (2010), Moll (2012); Guner, Ventura and Xu (2008) and Garicano, Lelarge and Van Reenen (2013). (Chen, Tian and Yu) Outward FDI and Distortion 7 / 38

17 Introduction Related Literature 1 FDI and MNCs: Horizontal: Markusen (1984), Brainard (1997), Helpman, Melitz and Yeaple (2004); Vertical: Helpman (1984), Antràs (2003, 2005) and Antràs and Helpman (2004). 2 Distortion and Misallocation: Hsieh and Klenow (2009), Restuccia and Rogerson (2008); Midrigan and Xu (2010), Moll (2012); Guner, Ventura and Xu (2008) and Garicano, Lelarge and Van Reenen (2013). 3 Chinese Economy, Distortions and Chinese MNCs: Bai, Hsieh and Song (2015), Brandt, Tombe and Zhu (2013), Khandelwal, Schott and Wei (2013); Rosen and Hanemann (2009), Tian and Yu (2014). (Chen, Tian and Yu) Outward FDI and Distortion 7 / 38

18 Stylized Facts Data Source Annual survey of Chinese manufacturing rms from 1998 to 2008 (all SOEs+private rms with sales higher than 5 million RMB). (Chen, Tian and Yu) Outward FDI and Distortion 8 / 38

19 Stylized Facts Data Source Annual survey of Chinese manufacturing rms from 1998 to 2008 (all SOEs+private rms with sales higher than 5 million RMB). Data set of Chinese MNCs' investment transactions (e.g., time of transaction, destination country, names of parent and aliated companies, industry code etc.) Data on MNCs from Zhejiang province for 2006 to It has information on investment amount for each FDI transaction. (Chen, Tian and Yu) Outward FDI and Distortion 8 / 38

20 Stylized Facts Data Source Annual survey of Chinese manufacturing rms from 1998 to 2008 (all SOEs+private rms with sales higher than 5 million RMB). Data set of Chinese MNCs' investment transactions (e.g., time of transaction, destination country, names of parent and aliated companies, industry code etc.) Data on MNCs from Zhejiang province for 2006 to It has information on investment amount for each FDI transaction. Orbis data on Chinese MNCs from 2005 to 2008 (merged with rst three data sets). (Chen, Tian and Yu) Outward FDI and Distortion 8 / 38

21 Stylized Facts Summary Statistics (Chen, Tian and Yu) Outward FDI and Distortion 9 / 38

22 Stylized Facts Findings: Productivity Premium for State-owned MNCs and Smaller Fraction of MNCs among SOEs (Chen, Tian and Yu) Outward FDI and Distortion 10 / 38

23 Stylized Facts Robustness: Productivity Premium for State-owned MNCs only Exists in Capital Intensive Industries Consistent with distortion against private rms in credit and capital markets. Lower xed cost of doing outward FDI for SOEs. (Chen, Tian and Yu) Outward FDI and Distortion 11 / 38

24 Stylized Facts Robustness: Distribution of Relative TFP for State-Owned MNCs FOSD that for Private MNCs (Chen, Tian and Yu) Outward FDI and Distortion 12 / 38

25 Stylized Facts Robustness: Productivity Dierence by Year (Chen, Tian and Yu) Outward FDI and Distortion 13 / 38

26 Stylized Facts Finding: Relative Size Premium for State-owned MNCs (Chen, Tian and Yu) Outward FDI and Distortion 14 / 38

27 Theory Demand Follow HMY (2004): Horizontal FDI; one industry; two countries; heterogeneous rms. (Chen, Tian and Yu) Outward FDI and Distortion 15 / 38

28 Theory Demand Follow HMY (2004): Horizontal FDI; one industry; two countries; heterogeneous rms. Utility: [ U = ω Ω where q(ω) consumption; σ: elasticity. ] σ q(ω) σ 1 σ 1 σ dω, (1) (Chen, Tian and Yu) Outward FDI and Distortion 15 / 38

29 Theory Demand Follow HMY (2004): Horizontal FDI; one industry; two countries; heterogeneous rms. Utility: [ U = ω Ω where q(ω) consumption; σ: elasticity. Demand function: ] σ q(ω) σ 1 σ 1 σ dω, (1) q(ω) = p(ω) σ PH 1 σ E H, (2) where P H : ideal price index at home and E H : total income of Home. (Chen, Tian and Yu) Outward FDI and Distortion 15 / 38

30 Theory Demand Follow HMY (2004): Horizontal FDI; one industry; two countries; heterogeneous rms. Utility: [ U = ω Ω where q(ω) consumption; σ: elasticity. Demand function: ] σ q(ω) σ 1 σ 1 σ dω, (1) q(ω) = p(ω) σ PH 1 σ E H, (2) where P H : ideal price index at home and E H : total income of Home. Revenue function: q β E 1 σ P β, (3) (Chen, Tian and Yu) Outward FDI and Distortion 15 / 38

31 Theory Demand Follow HMY (2004): Horizontal FDI; one industry; two countries; heterogeneous rms. Utility: [ U = ω Ω where q(ω) consumption; σ: elasticity. Demand function: ] σ q(ω) σ 1 σ 1 σ dω, (1) q(ω) = p(ω) σ PH 1 σ E H, (2) where P H : ideal price index at home and E H : total income of Home. Revenue function: where β σ 1 σ. Aggregate environment: q β E 1 σ P β, (3) D i P σ 1 i E i i {H, F } (Chen, Tian and Yu) Outward FDI and Distortion 15 / 38

32 Theory Supply: SOEs Three production modes: domestic production only; domestic+exporting; domestic+fdi. Fixed entry, production, exporting and FDI cost: f e, f d, f X and f I. (Chen, Tian and Yu) Outward FDI and Distortion 16 / 38

33 Theory Supply: SOEs Three production modes: domestic production only; domestic+exporting; domestic+fdi. Fixed entry, production, exporting and FDI cost: f e, f d, f X and f I. Productivity draw: ϕ. (Chen, Tian and Yu) Outward FDI and Distortion 16 / 38

34 Theory Supply: SOEs Three production modes: domestic production only; domestic+exporting; domestic+fdi. Fixed entry, production, exporting and FDI cost: f e, f d, f X and f I. Productivity draw: ϕ. Total variable cost features CRS. For SOEs: non-fdi: (q H + I {qe >0} τq E )w H, (4) ϕ where w H : wage at home. I { q E > 0} is an indication function for exporting. q H and q F : domestic sales and exports. FDI: q H w H + q F w F ϕ ϕ, (5) where w F wage in foreign country. q F :output produced by the foreign aliate. (Chen, Tian and Yu) Outward FDI and Distortion 16 / 38

35 Theory Supply: Private Firms For private rms: non-fdi: c(q H + I {qe >0} τq E )w H, (6) ϕ FDI: cq H w H ϕ + q F w F ϕ. (7) (Chen, Tian and Yu) Outward FDI and Distortion 17 / 38

36 Theory Supply: Private Firms For private rms: non-fdi: c(q H + I {qe >0} τq E )w H, (6) ϕ FDI: cq H w H ϕ + q F w F ϕ. (7) Distortion in input markers: wedge c > 1 for private rms when they produce at home. Thus, it applies to both exporting and domestic sales. (Chen, Tian and Yu) Outward FDI and Distortion 17 / 38

37 Theory Supply: Private Firms For private rms: non-fdi: c(q H + I {qe >0} τq E )w H, (6) ϕ FDI: cq H w H ϕ + q F w F ϕ. (7) Distortion in input markers: wedge c > 1 for private rms when they produce at home. Thus, it applies to both exporting and domestic sales. This wedge does not exist in foreign country. Thus, foreign aliates of private FDI rm do not face this distortion. (Chen, Tian and Yu) Outward FDI and Distortion 17 / 38

38 Theory Supply: Private Firms For private rms: non-fdi: c(q H + I {qe >0} τq E )w H, (6) ϕ FDI: cq H w H ϕ + q F w F ϕ. (7) Distortion in input markers: wedge c > 1 for private rms when they produce at home. Thus, it applies to both exporting and domestic sales. This wedge does not exist in foreign country. Thus, foreign aliates of private FDI rm do not face this distortion. Evidence: nancing cost, cost of acquiring land. No evidence on wage. (Chen, Tian and Yu) Outward FDI and Distortion 17 / 38

39 Theory Cutos: Selection Reversal Assume f I >> f X >> f D FDI cuto > exporting cuto > exit cuto among private rms and SOEs (sorting pattern). (Chen, Tian and Yu) Outward FDI and Distortion 18 / 38

40 Theory Cutos: Selection Reversal Assume f I >> f X >> f D FDI cuto > exporting cuto > exit cuto among private rms and SOEs (sorting pattern). Surviving and exporting cutos (tougher selection for private rms): ϕ PD (= c ϕ SD )> ϕ SD and ϕ PX (= c ϕ SX )> ϕ SX. (Chen, Tian and Yu) Outward FDI and Distortion 18 / 38

41 Theory Cutos: Selection Reversal Assume f I >> f X >> f D FDI cuto > exporting cuto > exit cuto among private rms and SOEs (sorting pattern). Surviving and exporting cutos (tougher selection for private rms): ϕ PD (= c ϕ SD )> ϕ SD and ϕ PX (= c ϕ SX )> ϕ SX. FDI cutos (tougher selection for SOEs): ϕ PO < ϕ SO. (Chen, Tian and Yu) Outward FDI and Distortion 18 / 38

42 Theory Cutos: Selection Reversal Assume f I >> f X >> f D FDI cuto > exporting cuto > exit cuto among private rms and SOEs (sorting pattern). Surviving and exporting cutos (tougher selection for private rms): ϕ PD (= c ϕ SD )> ϕ SD and ϕ PX (= c ϕ SX )> ϕ SX. FDI cutos (tougher selection for SOEs): ϕ PO < ϕ SO. Absent choice of exporting, FDI cuto would be the same for SOEs and private rms. (Chen, Tian and Yu) Outward FDI and Distortion 18 / 38

43 Theory Cutos: Selection Reversal Assume f I >> f X >> f D FDI cuto > exporting cuto > exit cuto among private rms and SOEs (sorting pattern). Surviving and exporting cutos (tougher selection for private rms): ϕ PD (= c ϕ SD )> ϕ SD and ϕ PX (= c ϕ SX )> ϕ SX. FDI cutos (tougher selection for SOEs): ϕ PO < ϕ SO. Absent choice of exporting, FDI cuto would be the same for SOEs and private rms. Firm at FDI cuto compares exporting with FDI selection reversal. (Chen, Tian and Yu) Outward FDI and Distortion 18 / 38

44 Theory Cutos: Graphical Representation (Chen, Tian and Yu) Outward FDI and Distortion 19 / 38

45 Theory Testable Predictions: Likelihood of Going abroad and Average Productivity of MNCs Proposition 1 (1). Conditioning on the initial draw, private rms are more likely to become MNCs. Next, Assume that the initial productivity draw follows the same Pareto distribution for SOEs and private rms. (2). Fraction of MNCs is higher among private rms than among SOEs. (3). Average productivity of private MNCs is smaller than that of state-owned MNCs. (Chen, Tian and Yu) Outward FDI and Distortion 20 / 38

46 Theory Testable Predictions: Likelihood of Going abroad and Average Productivity of MNCs Proposition 1 (1). Conditioning on the initial draw, private rms are more likely to become MNCs. Next, Assume that the initial productivity draw follows the same Pareto distribution for SOEs and private rms. (2). Fraction of MNCs is higher among private rms than among SOEs. (3). Average productivity of private MNCs is smaller than that of state-owned MNCs. Selection reversal productivity premium and tougher selection for state-owned MNCs. (Chen, Tian and Yu) Outward FDI and Distortion 20 / 38

47 Theory Testable Predictions: Relative Size Premium Proposition 3 Suppose the initial productivity draw follows the same Pareto distribution for SOEs and private rms. (1). Relative domestic size of private MNCs (i.e., compared with private non-exporting rms) is smaller than that of state-owned MNCs as well. (Chen, Tian and Yu) Outward FDI and Distortion 21 / 38

48 Theory Testable Predictions: Relative Size Premium Proposition 3 Suppose the initial productivity draw follows the same Pareto distribution for SOEs and private rms. (1). Relative domestic size of private MNCs (i.e., compared with private non-exporting rms) is smaller than that of state-owned MNCs as well. Tougher selection for state-owned MNCs. relative size premium for state-owned MNCs. (Chen, Tian and Yu) Outward FDI and Distortion 21 / 38

49 Theory Testable Predictions: Allocation of Output Allocation of output: Proposition 4 Ratio of foreign sales to domestic sales is higher for private MNCs than for state-owned MNCs. Suppose there is a reduction in xed cost of FDI. Conditional on initial productivity draw and other rm-level characteristics, increase in overall rm size is larger for new private MNC than for state-owned MNC. (Chen, Tian and Yu) Outward FDI and Distortion 22 / 38

50 Theory Testable Predictions: Allocation of Output Allocation of output: Proposition 4 Ratio of foreign sales to domestic sales is higher for private MNCs than for state-owned MNCs. Suppose there is a reduction in xed cost of FDI. Conditional on initial productivity draw and other rm-level characteristics, increase in overall rm size is larger for new private MNC than for state-owned MNC. Extra benet for private rms to invest abroad increase in overall rm size is bigger for them. Private MNCs produce and sell disproportionately more in foreign markets owing to non-existence of distortion in that market. (Chen, Tian and Yu) Outward FDI and Distortion 22 / 38

51 Evidence Evidence for Part One of Proposition One Conditional on other rm-level characteristics, SOEs are less like to do outward FDI. (Chen, Tian and Yu) Outward FDI and Distortion 23 / 38

52 Evidence Existence of Discrimination Against Private Firms Private rms pay higher nancing cost and land acquisition cost than SOEs. (Chen, Tian and Yu) Outward FDI and Distortion 24 / 38

53 Evidence Evidence for Proposition Four Ratio of foreign sales to domestic sales is higher for private MNCs than for state-owned MNCs. (Chen, Tian and Yu) Outward FDI and Distortion 25 / 38

54 Evidence Evidence for Proposition Four Change in rm size is bigger for private MNC.. (Chen, Tian and Yu) Outward FDI and Distortion 26 / 38

55 Evidence Discussion of Modeling Choices Version of subsidy to MNCs yields same qualitative result. In this case, private rms have relatively higher incentive of doing FDI. (Chen, Tian and Yu) Outward FDI and Distortion 27 / 38

56 Evidence Discussion of Modeling Choices Version of subsidy to MNCs yields same qualitative result. In this case, private rms have relatively higher incentive of doing FDI. Dierence in xed costs? Model can explain extensive margin, but cannot explain intensive margin (i.e., Prop. 4). (Chen, Tian and Yu) Outward FDI and Distortion 27 / 38

57 Evidence Discussion of Modeling Choices Version of subsidy to MNCs yields same qualitative result. In this case, private rms have relatively higher incentive of doing FDI. Dierence in xed costs? Model can explain extensive margin, but cannot explain intensive margin (i.e., Prop. 4). Discrimination in product market? Model would predict selection reversal for both exporting SOEs and multinational SOEs (not true in data). Role of capital? Could just replace labor by capital, if we don't assume any adjustment cost. When both factors (as in Bernard Redding and Schott's RES paper) are present, distortion in capital market also aect rm's labor choice (i.e., complements). (Chen, Tian and Yu) Outward FDI and Distortion 27 / 38

58 Quantication Calibration How distortions aect the share of MNCs, aggregate productivity and welfare after investment liberalization (i.e., f I goes down). Consider two symmetric countries and a reduction in f I in both countries. (Chen, Tian and Yu) Outward FDI and Distortion 28 / 38

59 Quantication Calibration How distortions aect the share of MNCs, aggregate productivity and welfare after investment liberalization (i.e., f I goes down). Consider two symmetric countries and a reduction in f I in both countries. Take no stance on how taxes are levied and how it aects welfare. (Chen, Tian and Yu) Outward FDI and Distortion 28 / 38

60 Quantication Calibration How distortions aect the share of MNCs, aggregate productivity and welfare after investment liberalization (i.e., f I goes down). Consider two symmetric countries and a reduction in f I in both countries. Take no stance on how taxes are levied and how it aects welfare. We do calibration by considering two symmetric countries. Unknown parameters (wage normalized to one): (f d, f X, f I, f e, τ, c, k, σ). (Chen, Tian and Yu) Outward FDI and Distortion 28 / 38

61 Quantication Calibration How distortions aect the share of MNCs, aggregate productivity and welfare after investment liberalization (i.e., f I goes down). Consider two symmetric countries and a reduction in f I in both countries. Take no stance on how taxes are levied and how it aects welfare. We do calibration by considering two symmetric countries. Unknown parameters (wage normalized to one): (f d, f X, f I, f e, τ, c, k, σ). We put higher weight on the moment related to the share of MNCs. (Chen, Tian and Yu) Outward FDI and Distortion 28 / 38

62 Quantication Moments Moments from the Data: Data Parameter Pareto Shape Parameter k Ratio of average productivity 1.2 c Export Intensity 26.28% τ Share of exporters 16.11% f X Average employment 265 f d Share of MNCs 0.325% f I (Chen, Tian and Yu) Outward FDI and Distortion 29 / 38

63 Quantication Moments Moments from the Data: Data Parameter Pareto Shape Parameter k Ratio of average productivity 1.2 c Export Intensity 26.28% τ Share of exporters 16.11% f X Average employment 265 f d Share of MNCs 0.325% f I We exclude rms whose export intensity is higher than 70% (processing trade). (Chen, Tian and Yu) Outward FDI and Distortion 29 / 38

64 Quantication Parameter Values Calibrated parameters: Value Sources σ 4 Bernard et al. (2003) ϕ min,soe 1 normalization ϕ min,private 1 normalization f e 1 normalization k Calculated c 1.2 Calculated τ 1.41 Calculated f X Calibrated f d Calibrated f I Calibrated (Chen, Tian and Yu) Outward FDI and Distortion 30 / 38

65 Quantication Counterfactual Analysis We consider a scenario in which f I goes down by a half while other parameters are kept unchanged. (Chen, Tian and Yu) Outward FDI and Distortion 31 / 38

66 Quantication Counterfactual Analysis We consider a scenario in which f I goes down by a half while other parameters are kept unchanged. Increase in the share of MNCs is larger when the distortions are more severe in the domestic market. Quantitative magnitude is high. (Chen, Tian and Yu) Outward FDI and Distortion 31 / 38

67 Quantication Share of MNCs (Chen, Tian and Yu) Outward FDI and Distortion 32 / 38

68 Quantication Counterfactual Analysis (Cont.) Increase in aggregate productivity is larger when distortions are more severe, since more private rms circumvent domestic distortions by going abroad after reduction in f I. (Chen, Tian and Yu) Outward FDI and Distortion 33 / 38

69 Quantication Counterfactual Analysis (Cont.) Increase in aggregate productivity is larger when distortions are more severe, since more private rms circumvent domestic distortions by going abroad after reduction in f I. Reduction in mass of active rms. Gains in aggregate productivity (i.e., reduction in ideal price index). (Chen, Tian and Yu) Outward FDI and Distortion 33 / 38

70 Quantication Aggregate Productivity (Chen, Tian and Yu) Outward FDI and Distortion 34 / 38

71 Conclusion Concluding Remarks Document three fascinating facts: 1 Productivity premium for state-owned MNCs. 2 Smaller fraction of MNCs among SOEs. 3 Size premium for state-owned MNCs. (Chen, Tian and Yu) Outward FDI and Distortion 35 / 38

72 Conclusion Concluding Remarks Document three fascinating facts: 1 Productivity premium for state-owned MNCs. 2 Smaller fraction of MNCs among SOEs. 3 Size premium for state-owned MNCs. Build up model to rationalize these eects: 1 Institutional arbitrage and selection reversal. (Chen, Tian and Yu) Outward FDI and Distortion 35 / 38

73 Conclusion Concluding Remarks Document three fascinating facts: 1 Productivity premium for state-owned MNCs. 2 Smaller fraction of MNCs among SOEs. 3 Size premium for state-owned MNCs. Build up model to rationalize these eects: 1 Institutional arbitrage and selection reversal. Future work: 1 Explore dierence in behavior and motives of rms (from developing countries) that go abroad: Brand-building motive? (Chen, Tian and Yu) Outward FDI and Distortion 35 / 38

74 Conclusion Concluding Remarks Document three fascinating facts: 1 Productivity premium for state-owned MNCs. 2 Smaller fraction of MNCs among SOEs. 3 Size premium for state-owned MNCs. Build up model to rationalize these eects: 1 Institutional arbitrage and selection reversal. Future work: 1 Explore dierence in behavior and motives of rms (from developing countries) that go abroad: Brand-building motive? 2 At micro-level, how do these dierences impact rm-level R&D? 3 At macro-level, how do these dierences aect calculation of misallocation? (Chen, Tian and Yu) Outward FDI and Distortion 35 / 38

75 Appendix A World with Subsidy We consider a scenario in which f I goes down by a half while other parameters are kept unchanged. (Chen, Tian and Yu) Outward FDI and Distortion 36 / 38

76 Appendix A World with Subsidy We consider a scenario in which f I goes down by a half while other parameters are kept unchanged. Measure of welfare: Welfare = 1 subtaxper(c, f I ) P H. (Chen, Tian and Yu) Outward FDI and Distortion 36 / 38

77 Appendix A World with Subsidy We consider a scenario in which f I goes down by a half while other parameters are kept unchanged. Measure of welfare: Welfare = 1 subtaxper(c, f I ) P H. Dierent implications for aggregate productivity and welfare. Go back (Chen, Tian and Yu) Outward FDI and Distortion 36 / 38

78 Appendix Share of MNCs (Chen, Tian and Yu) Outward FDI and Distortion 37 / 38

79 Appendix Welfare and Aggregate Productivity (Chen, Tian and Yu) Outward FDI and Distortion 38 / 38