ODI and Home Country's Industrial Upgrading: Mechanism and preliminary evidence

Author Name ZHAO Wei  (Visiting Fellow, RIETI / Institute of International Economics, Zhejiang University) /JING Dong  (Zhejiang University)
Creation Date/NO. March 2011 11-E-032
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Both the outward direct investment (ODI) from emerging market economies and industrial upgrading are new topics in economic research. Most research on these two topics has been done separately so far. China's emergence as a major ODI nation and urgent requirement for domestic industrial upgrading are increasingly bringing these together. With the hypothesis of the causal connection between the ODI and industrial upgrading, this paper tries to clarify the channel and mechanism that ODI spreads in terms of its effect on home countries' industries and to identify related evidence with a way of bringing knowledge in three research fields together: a) the historical experience of the ODI Pioneering countries; b) clues found from existing research and cases at sector level; c) evidence from China. Research shows that there are clear upgrading effects of the ODI in US and Japan's history when they emerged as ODI nations although they took different patterns. The pattern taken by the US was featured with efficiency priority, while that of Japan does so with structural adjustment priority. The mechanism and channels through which the ODI imposes effects on home industries' upgrading in China are more extensive than that of pioneer industrial countries. Besides, the empirical work done with the typical regions and typical industrial sectors gives clear support on the upgrading effects hypothesis in China.