Effect of foreign capital’s entry into China on the price changes in China’s industrial sector and its mechanism
【Abstract】What is the influence of foreign capital’s entry on the price changes in China’s industrial sector? What is the mechanism behind such influence? In this paper, we answer these two questions through theoretical and empirical analysis. This study finds that: in both the short term and the long term, the entry of foreign capital influences the price changes in China’s industrial sector through improving labor productivity and weakening monopoly power. The entry of foreign capital strongly inhibits the price rise in China’s industrial sector by improving labor productivity in the short term and by weakening monopoly power in the long term. From 1999 to 2012, due to the entry of foreign capital, the Chinese industrial sector’ labor productivity increased by 25.0598%, the monopoly power decreased by 1.7538%, and the price of China’s industrial sector reduced by 2.4629%. The research results indicate that since China’s reform and opening up, the entry of foreign capital has promoted the increase in the labor productivity of Chinese industries, weakened monopoly power in some industries, reduced the price of China’s industrial sector on the whole, curbed inflation, and thereby improved China’s social welfare level.
【Keywords】 foreign capital’s entry; labor productivity; monopoly power; price change in the industrial sector;
. ① This conclusion has been confirmed by the research data in this paper. We have tested the effects of foreign investment on the average performance of domestic enterprises and on the relative average performance of FIEs compared to domestic enterprises. The test results show significantly positive impact of foreign investment on the average performance of domestic enterprises and foreign investment helps to reduce the performance gap between FIEs and domestic enterprises. Due to space limitations, these empirical results are not presented in this paper but can be obtained from the authors upon request. [^Back]
. ① Due to space limitations, only the robustness test results for the simultaneous equations model are presented in this paper. The robustness test results for the single equation model are not presented in the paper, but can be obtained from the authors upon request. [^Back]
 Shi, J. Journal of Beijing Jiaotong University (Social Sciences Edition) (北京交通大学学报（社会科学版）), (1): 60–64 (2009).
 Lang, X. New Imperialism in China (新帝国主义在中国). Beijing: Oriental Press, (2010).
 Li, Q. Journal of Southeast University (Philosophy and Social Sciences Edition) (东南大学学报（ 哲学社会科学版）), (4): 41–46 (2009).
 Li, X. & Zhang, X. China Industrial Economics (中国工业经济), (3): 129–138 (2011).
 Jiang, X. Journal of Economic Research (经济研究), (9): 31–38 (2002).
 Wang, Z. International Economic Cooperation (国际经济合作), (3): 36–40 (2010).
 Melitz，M.J.，and G. I. Ottaviano. Market Size，Trade，and Productivity. The Review of Economic Studies，2008，75(1): 295-316.
 Chor，D.Subsidies for FDI: Implications from a Model with Heterogeneous Firms. Journal of International Economics，2009，78(1): 295-316.
 Melitz，M. J. The Impact of Trade on Intra-industry Reallocations and Aggregate Industry Productivity. Econometrica，2003，71(6): 1695-1725.
 Chen，N.，J. Imbs，and A.Scott.The Dynamics of Trade and Competition. Journal of International Economics，2009，77(1): 50-62.
 Cavelaars，P. Does Competition Enhancement Have Permanent Inflation Effects. Kyklos，2003，56(1): 69-94.
 Przybyla，M.，and M. Roma. Does Product Market Competition Reduce Inflation? Evidence from EU Countries and Sectors. ECB Working Paper，2005.
 National Bureau of Statistics Research Group. Statistical Research (统计研究), (1): 3–10 (2001).
 Li, H. China Industrial Economics (中国工业经济), (8): 62–66 (1997).
 Bu, W., Xie, M. & Cai, H. Central University of Finance and Economics (中央财经大学学报), (3): 62–66 (2011).
 Epifani，P.，and G. Gancia. Trade，Markup Heterogeneity and Misallocations. Journal of International Economics，2011，83(1): 1-13.
 Federico，S.Industry Dynamics and Competition from Low-Wage Countries:Evidence on Italy.Oxford Bulletin of Economics and Statistics，2014，76(3): 389-410.
 Binici，M.，Y. W. Cheung，and K. S. Lai. Trade Openness，Market Competition，and Inflation: Some Sectoral Evidence from OECD Countries. International Journal of Finance and Economics，2012，17(4): 321-336.
 Yin, H. & Lu, M. Management World (管理世界), (1): 39–45 (2004).
 Yin, H., Pan, Z. & Lu, M. Management World (管理世界), (7): 34–45 (2006).
 Wei, H. Reform (改革), (5): 86–91 (2004).
 Li, Z. & Ye, A. Advanced Econometrics (高等计量经济学), Beijing: Tsinghua University Press, (2000).
 He, L., Fan, G. & Hu, J. Journal of Economic Research (经济研究), (11): 16–26 (2008).
 Xie, J. World Economy Studies (世界经济研究), (7): 34–39 (2003).