Outward FDI and Domestic Input Distortions: Evidence from Chinese Firms

Abstract

We examine how domestic distortions affect firms’ production strategies abroad by doc-umenting two puzzling findings using Chinese firm-level data of manufacturing firms. First, privatemultinational corporations (MNCs) arelessproductive than state-owned MNCs, while they are moreproductive than state-owned enterprises overall. Second, there are disproportionately fewer state-ownedMNCs than private MNCs. We build a model to rationalize these findings by showing that discriminationagainst private firms domestically incentives them to produce abroad. The model shows that selectionreversal is more pronounced in industries with more severe discrimination against private firms, whichreceives empirical support.