The impact of foreign divestment on Chinese firms' DVAR in exports

Abstract

Multinational corporations' divestments are an important but underexplored phenomenon. This paper examines the impact of foreign divestment on the export domestic value-added ratio (DVAR) of Chinese firms. Utilizing data from the Chinese Annual Survey of Industrial Enterprises from 2011 to 2015, we employ a combination of the difference-in-differences method and propensity score matching to investigate the own-plant-effect of divestment on the export DVAR of foreign-invested enterprises (FIEs). Our analysis leads to several conclusions. Firstly, foreign divestment significantly negatively impacts the FIEs' export DVAR. Secondly, non-Hong Kong, Macao, and Taiwan (HMT) foreign firms, eastern region firms, processing trade firms, and labor-intensive firms are particularly vulnerable to the adverse effects of foreign divestment. Thirdly, the decline in FIEs' export DVAR post-divestment as a consequence of reduced cost markups and increased relative prices of intermediate inputs. Furthermore, we extend our analysis to assess the spillover effects of foreign divestment on domestic firms both within and across industries. The results suggest that foreign divestment negatively affect the export DVAR of local counterparts, especially through horizontal and backward linkages. These findings enhance the understanding of the persistence of benefits from foreign direct investment and the economic impacts of foreign divestment on the host country firms.