TradeandForeignDirectInvestmentinChina.docVIP

Trade and Foreign Direct Investment in China: A Political Economy Approach by Lee G.Branstetter Dept.of Economics,Univ.of California,Davis and NBER and Robert C.Feenstra Dept.of Economics,Univ.of California,Davis, Haas School of Business,Univ.of California,Berkeley, and NBER Revised,March 1999 Acknowledgements:We thank Chen Chun-Lai,Wen Hai,David Li,Barry Naughton,Daniel Rosen,Scott Rozelle,Edward Steinfeld,William Skinner,Eric Thun,Shang-Jin Wei,Wing Woo,Alwyn Young and seminar participants at the University of Michigan and the World Bank for helpful comments and suggestions.We are indebted to a large team of research assistants, including Natasha Hsieh,Songhua Lin,Kaoru Nabeshima,Shun-li Yao,and David Yue. Branstetter wishes to thank the Japan Foundation Center for Global Partnership and the Social Science Research Council for financial support of the fieldwork component of this project,and he thanks the many anonymous China-based multinational executives who provided their insights concerning the environment confronting foreign firms in China.He also acknowledges the support of a University of California Faculty Research Grant.Feenstra thanks the National Science Foundation for financial support.All errors are the sole responsibility of the authors. Trade and Foreign Direct Investment in China: A Political Economy Approach Abstract We view the political process in China as trading off the social benefits of increased trade and foreign direct investment,against the losses incurred by state-owned enterprises due to such liberalization.A model drawing on Grossman and Helpman 1994,1996 is used to derive an empirically estimable government objective function.The key structural parameters of this model are estimated using province-level data on foreign direct investment and trade flows in China,over the years 1984-1995.We find that the weight applied to consumer welfare is between one-fifth and one-twelfth of the weight applied to the output of state-owned enterprises.