Sunday 18 October 2009

Foreign direct investment, processing trade, and the sophistication of China's exports

Just how sophisticated are China's exports becoming? This paper is distantly related to the Puga and Treflet paper below but is far more readable.

Another paper on my "must read" list.

Foreign direct investment, processing trade, and the sophistication of China's exports

Bin XU and Jiangyong LU

Received 28 October 2007;
revised 23 January 2009;
accepted 26 January 2009.
Available online 5 February 2009.


China's export structure has shown a rapid shift towards more sophisticated industries. While some believe that this trend is a result of processing trade and foreign direct investment, the evidence is mixed. This paper examines variations in level of export sophistication across China's manufacturing industries. We find that an industry's level of export sophistication is positively related to the share of wholly foreign owned enterprises from OECD countries and the share of processing exports of foreign-invested enterprises, and negatively related to the share of processing exports of indigenous Chinese enterprises. Evidence from the relative export prices of Chinese goods, which measure within-product export sophistication, shows a similar pattern.

Keywords: China; Foreign direct investment; Processing trade; Sophistication of exports

JEL classification codes: F1; O1

"Wake up and smell the ginseng"

A good paper in the recent issue of the Journal of Development Economics - the premier development journal.

The paper attempts to model incremental innovation in low wage economies such as China and India. The model makes sense and this represents a potentially important paper.

Puga and Trefler and premiership academics - this is a quality piece of work.

Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries

Diego Puga and Daniel Trefler

Received 12 September 2007;
revised 27 January 2009;
accepted 27 January 2009.
Available online 9 February 2009.


Increasingly, a small number of low-wage countries such as China and India are involved in incremental innovation. That is, they are responsible for resolving production-line bugs and suggesting product improvements. We provide evidence of this new phenomenon and develop a model in which there is a transition from old-style product-cycle trade to trade involving incremental innovation in low-wage countries. The model explains why levels of involvement in incremental innovation vary across low-wage countries and across firms within each low-wage country. We draw out implications for sectoral earnings, living standards, the capital account and, foremost, international trade in goods.

Keywords: International trade; Low-wage country innovation

JEL classification codes: F1


The evolution of renminbi yuan and the protracted debate on its undervaluation

A good paper in the Journal of Asian Economics. Summarises the various issues very well.

The evolution of renminbi yuan and the protracted debate on its undervaluation: An integrated review

Dilip K.


For virtually a decade, the undervaluation of RMB yuan has become an issue of impassioned debate in international monetary economics. This issue kept the academic and policy circles engrossed in argumentative deliberations. That RMB yuan is undervalued is widely acknowledged. With China's emergence as an economic superpower of the future, this debate no doubt has considerable merit and ramifications. This article examines sang-froid the RMB yuan undervaluation and provides a review of recent and on-going research on it. The mid-2005 currency revaluation and modification of foreign exchange regime has enormous significance in this regard. It became a defining moment in the RMB yuan debate.

This article attempts to examine whether accusations of currency manipulation made against China can hold, or are merely disingenuous. It encourages the reader to see whether the RMB yuan should be further appreciated. If yes, whether the misalignment is inordinately large or of incidental order which would be corrected with the passage of time. A good number of econometric exercises were undertaken, using differing methodologies. There was a complete lack of consensus on the misalignment of the RMB yuan. It has slowly appreciated since it abandoned its dollar peg in 2005. As the Chinese economy picks up further growth momentum, the currency appreciation is expected to accelerate.

Keywords: China; RMB yuan; Currency misalignments

JEL classification codes: F30; F31; F33

Tuesday 13 October 2009

Foreign Direct Investment in China

The latest Review of Development Economics issue has a number of papers on FDI in China.

Some interesting topics - I shall try to get around to reading the Kunal Sen paper.

Review of Development Economics

Special Section: FDI, Employment, and Growth in China and India (p 737-739)
Amelia U. Santos-Paulino, Guanghua Wan
Published Online: Aug 27 2009 3:45AM
DOI: 10.1111/j.1467-9361.2009.00512.x

Abstract | References | Full Text: HTML, PDF (Size: 35K)

FDI Liberalization as a Source of Comparative Advantage in China (p 740-753)
Sebastian Claro
Published Online: Aug 27 2009 3:45AM
DOI: 10.1111/j.1467-9361.2009.00513.x

Abstract | References | Full Text: HTML, PDF (Size: 288K)

Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies (p 754-764)
Manop Udomkerdmongkol, Oliver Morrissey, Holger Görg
Published Online: Aug 27 2009 3:46AM
DOI: 10.1111/j.1467-9361.2009.00514.x

Abstract | References | Full Text: HTML, PDF (Size: 88K)

International Trade and Manufacturing Employment: Is India following the Footsteps of Asia or Africa? (p 765-777)
Kunal Sen
Published Online: Aug 27 2009 3:46AM
DOI: 10.1111/j.1467-9361.2009.00515.x

Abstract | References | Full Text: HTML, PDF (Size: 112K)

Foreign Direct Investment and Regional Inequality in China (p 778-791)
Kailei Wei, Shujie Yao, Aying Liu
Published Online: Aug 27 2009 3:47AM
DOI: 10.1111/j.1467-9361.2009.00516.x

Abstract | References | Full Text: HTML, PDF (Size: 154K)


Monday 5 October 2009

China's Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances

A recent paper by Max Corden in the Economics Journal has a good account of the "China surplus" debate.

China's Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances

W. Max Corden 1
University of Melbourne


This article is stimulated by current criticisms of Chinese exchange rate policy. The concern is really about China's current account surplus. The article discusses the factors that determine the surplus, and the reasons why the surplus increased sharply from 2005. The international implications of China's surplus and growth are discussed, and how it has affected the world real interest rate, and through that the US current account deficit. The surplus has had various international relative price effects, which have produced both gainers and losers. Finally, the surplus played only a small part in determining the world credit crisis.


Thursday 1 October 2009