Effect of foreign capital’s entry into China on the price changes in China’s industrial sector and its mechanism

FENG Genfu1 MAO Yi1

(1.School of Economics and Finance, Xi'an Jiaotong University, Xi'an 710061, China 710061)

【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;


【Funds】 National Social Sciences Foundation Project (14BJY002)

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    [1]. 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]

    [2]. 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]


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This Article


CN: 11-3536/F

Vol , No. 12, Pages 36-50

December 2015


Article Outline


  • 1 Introduction
  • 2 Model analysis and hypotheses
  • 3 Empirical model, variables and estimation methods
  • 4 Econometric analysis and results
  • 5 Further discussions
  • 6 Conclusion and policy implications
  • Footnote