China's outward foreign direct investment and domestic investment: An industrial level analysis

- We examine how domestic investment responds to outward FDI in Chinese industries.
- We account for the role of government support, and adopt the system-GMM to estimate.
- Domestic investment responds positively to outward FDI in China.
- The level of government support affects how outward FDI influences domestic investment.
- Domestic investment reacts more strongly to outward FDI in state-dominated industries.

In the past decade, China's outward foreign direct investment (FDI) has increased significantly. On the other hand, the Chinese economic growth model is heavily reliant on domestic investment. Our study examines the important issue of how China's domestic investment responds to its FDI outflows. We investigate this issue analyzing, for the first time, China's domestic investment at industrial level. We specifically account for the factor of government support given the significant role played by the state in the Chinese economy. Using industrial level data, we further evaluate whether domestic investment reacts to outward FDI differently between state dominated and non-state dominated industries. Our study adopts an accelerator model where the system-Generalized Method of Moments (GMM) is employed for our estimations. Our empirical results suggest that domestic investment responds positively to outward FDI in China, Furthermore, the FDI outflows influences domestic investment differently depending on the level of government support in the particular industries. Such influence is much stronger in state dominated industries than in the non-state dominated ones.