Trade and Foreign Direct Investment in China: A Political Economy Approach

2002-12-01T00:00:00Z (GMT) by Lee Branstetter Robert C. Feenstra
We view the political process in China as trading off the social benefits of increased trade and foreign direct investment against the losses incurred by state-owned enterprises due to such liberalization. A model drawing on Grossman and Helpman [Am. Econ. Rev. 84 (1994) 833; The Political Economy of Trade Policy: Papers in Honor of Jagdish Bhagwati, MIT Press, Cambridge (1996) 199] is used to derive an empirically estimable government objective function. The key structural parameters of this model are estimated using province-level data on foreign direct investment and trade flows in China, over the years 1984–1995. We find that the weight applied to consumer welfare is between one-seventh and one-quarter of the weight applied to the output of state-owned enterprises.