THE INDUSTRIAL IMPACTS OF FOREIGN DIRECT INVESTMENT LIBERALIZATION: EVIDENCE FROM CHINA

In this paper, we examine the industrial impacts of China’s 2002 FDI Liberalization policy, which relaxed foreign direct investment (FDI) restrictions across a substantial portion of industries. We focus on the effects of this policy on industrial productivity dispersion, a key indicator of resource misallocation. Utilizing firm-level data covering most manufacturing sectors in China from 1998 to 2007, we employ a difference-in-differences estimation strategy. Our results show that FDI deregulation significantly reduces productivity dispersion, indicating improved resource allocation within industries. Notably, the exit of zombie firms and greater TFP improvement of surviving low-productivity firms jointly drive this positive outcome. Furthermore, heterogeneous analyses reveal that industries with comparative disadvantage are more sensitive to the effects of FDI liberalization.