A fire sale without fire: An explanation of labor-intensive FDI in China |
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| Institution: | 1. MIT Sloan School of Management, USA;2. Department of Economics and Finance, College of Business, City University of Hong Kong, Hong Kong;3. School of Management, Huazhong University of Science and Technology, China;4. Department of Economics, Chinese University of Hong Kong, Hong Kong;1. SUNY Buffalo Law School, 618 John Lord O’Brian Hall, Buffalo, NY 14260-1100, United States;2. SUNY, Department of Economics, University at Buffalo, 423 Fronczak Hall, Buffalo, NY 14260-1100, United States;1. Seoul National University, Seoul 151-746, Republic of Korea;2. Southern Illinois University Edwardsville, IL 62015, USA;1. Southwestern University of Finance and Economics, China and Texas A&M University, USA;2. International Food Policy Research Institute, USA;3. Southwestern University of Finance and Economics, China |
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| Abstract: | 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. |
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