Research Progress of Foreign Direct Investment and Global Value Chain Status

Hongyu ZHAO

College of Economics and Management, Zhejiang A&F University, Hangzhou 311300, China

Abstract With the rapid development of globalization, the industries of various countries are actively seeking the best way to improve the global value chain (GVC) status while integrating into the world. As an important factor affecting the GVC status, foreign direct investment (FDI) has attracted extensive attention from scholars. On the basis of systematically summarizing the research progress of FDI theory, GVC status and the influence of FDI on GVC status, the paper tries to clarify the internal relationship between FDI and GVC status, explores the shortcomings of existing research, and puts forward the possible direction of future research.

Key words Foreign direct investment (FDI), Manufacturing industry, Global value chain (GVC) status

1 Introduction

Under the background of economic globalization, the global value chain (GVC) is constantly deepening and expanding, becoming a dynamic pattern reflecting the vertical integration of global production. The GVC division of labor not only realizes the transformation from inter-industry division to intra-product division through the carrier of foreign direct investment (FDI), but also has a significant impact on the pattern of international trade. The production layout of FDI has become an important endogenous driving force for the change of GVC status[1], and manufacturing industry, as the most typical industry of global division of production, has also become a global strategic emerging industry. With the deepening of global division of labor in manufacturing industry, the discussion on GVC for manufacturing industry in open economy should not only consider the changes of domestic and foreign markets in manufacturing industry, but also grasp the impact of FDI on manufacturing transfer[2]. Numerous studies have been carried out in the academic circle, and scholars have found that there is a closer relationship between manufacturing industry and FDI[3]. Therefore, it is of great significance for enterprises to explore the potential opportunities of GVC and to better conduct FDI by studying the GVC status of manufacturing industry.

In recent years, the impact of FDI on GVC status has become a hot topic of academic research at home and abroad. Scholars have conducted researches mainly from the perspectives of FDI restrictions in host countries[4], two-way FDI[5]and trade friction[6]. In addition, scholars also measured the division status of GVC by constructing different indicators, such as vertical specialization index[7], GVC status index[8],etc.Although there are many measurement methods, the results obtained are quite different. Therefore, this paper attempts to clarify the relationship between FDI and GVC status based on systematic review of relevant literature, and to explore the possible development direction in the future.

2 FDI theory

With the development of global economic integration, transnational operation of enterprises has become the mainstream. FDI, as the most important form of foreign economic relations of transnational enterprises, has attracted great attention. Theoretical research on FDI in academic circles began in the 1960s and has formed a relatively mature theoretical system. It can be found that relevant research is mainly conducted from macro, meso and micro perspectives.

In the macro perspective, scholars mainly study on the basis of international trade theory, and put forward product life cycle theory, investment development cycle theory, technology accumulation theory, technology localization theory and other theories. In the meso perspective, studies are mainly conducted based on the theory of industrial organization. For example, the theory of marginal industry transfer proposed by Kiyoshi Kojima (1975) is to maximize the added value of capital through transnational operation. In the micro perspective, the proposal of monopoly advantage theory marked the beginning of the formation of FDI theory[9]. Since then, relevant theoretical achievements have continuously emerged, such as internalization theory, eclectic theory of international production, competitive advantage theory, global strategic theory of transnational corporations,etc.

After entering the 21stcentury, the theoretical research on FDI has not stopped. Dunning[10]suggested that FDI is facing new development and changes, and globalization and new development paradigm have become important factors influencing competitive advantage of enterprise investment.

3 Research progress of GVC status

3.1 Research progress of GVC theoryGVC can be traced back to Porter’s theory of enterprise value chain[11], which laid a foundation for the development and formation of GVC. On this basis, Kogut[12]proposed the "fragmented" value chain theory, and the GVC theory began to take shape. As the value chain theory began to connect the global economy and industry, the global commodity chain theory was derived. Gereffi[13]proposed the GVC theory, focusing on the value-added links of products, the relationship between enterprises within the value chain and the benefit distribution. In the new era, the connotation of GVC theory is constantly enriched and developed.

The GVC theory includes the driving theory of GVC, the governance theory of GVC and the upgrading theory of GVC[14]. In the process of the theory development driven by GVC, GVC governance has undergone a series of changes. Based on the concept of value chain governance[15], GVC governance structure is divided into network type, quasi-hierarchical type, hierarchical type and market type[16], and then expanded into market type, module type, relationship type and leadership type from low-end to high-end, further expanding the GVC governance pattern[17]. In addition, under different governance patterns, enterprises must improve their competitiveness if they want to make further breakthroughs. Therefore, scholars have paid much attention to the upgrading of GVC.

3.2 Measurement research of GVC statusGVC status refers to the international division of labor status of a country or a region under the background of GVC theory. How to improve the status of GVC has become a hot topic for many scholars. At the same time, traditional methods can no longer explain the real rate of return of a country, so scholars begin to explore how to measure the trade status of a country more comprehensively, and then measure its GVC status. Currently, there are five methods to measure the status of GVC, namely value-added export technology complexity[18], KWW method[8], upstream and downstream degree index[19-20], WWZ decomposition method[21], and ratio of forward and backward production length[21]. Specifically, Hausmannetal.[18]indirectly measured the GVC division status of manufacturing industry from the perspective of export technology complexity, and found that countries with stronger international competitiveness had higher value-added rate, with a higher GVC status. Koopmanetal.[8]calculated the GVC status index from the perspective of value-added trade to measure the relative position of a country’s manufacturing sector in GVC. The higher the status index, the higher the status of a country’s manufacturing sector in the production link of GVC. Subsequently, Milleretal.[19]and Fally[20]measured the status of a country in GVC from the perspective of the number of production stages, expressed and verified the upstream degree by the production distance from the production stage to the final demand stage of the production link, and expressed the downstream degree by the distance between the industrial sector and the input factors in the initial production chain. High downstream degree indicates that the production of products is in the downstream link of GVC. Some scholars[21-22]conducted relevant studies from two perspectives; from the perspective of value-added trade, the GVC status of China’s service industry was estimated by WWZ decomposition method; in terms of value added perspective, by measuring the GVC status with the ratio of upstream production length to downstream production length, it was concluded that the production behavior of developed countries was mainly concentrated on export products with high technology content and high added value and they had absolute advantages in the upstream of GVC, while developing countries drew exactly the opposite conclusion.

To sum up, the academic circle has made remarkable achievements in measuring the status of GVC. Studies have found that there are a wide range of factors affecting the status of GVC, among which FDI, production capacity, trade and investment policy and business environment have become one of the most important factors.

4 Influence of FDI on GVC status

4.1 Theoretical researchThe upgrading of a country’s GVC status is inseparable from the combination of local production factors and foreign advanced production patterns, and FDI is the direct driving force for the formation of GVC[6]. From the perspective of internal function, FDI promotes the upgrading of the GVC status of the home country through three routes: resource allocation efficiency, reverse technology spillover effect and industrial hollowing out, among which the technology spillover effect is the most important.

Scholars have put forward different views on how FDI promotes the status of GVC. Some scholars believe that internal environment is the most important factor influencing the change of GVC status caused by FDI. For example, Lin Xuejun and Zhang Wenfeng[6]pointed out that FDI would have an important impact on the host country’s adjustment of GVC in terms of enterprises, industries and regions. Other scholars argue that the external environment is an important factor. For example, Fang Yuanetal.[23]suggested that increasing research and development investment and improving technology intensity can improve the division of labor status in GVC. Li Yi and Li Ping[24]put forward that a good institutional environment is more conducive to the improvement of GVC promoted by FDI. The above studies basically form a consensus that FDI has a positive promoting effect on the improvement of GVC status, but there are great differences in resource endowments among the major economies at different stages of development in various countries, so FDI with different investment motives will also produce different influences.

4.2 Empirical researchAs for the influence of FDI on the division of labor status of the home country in GVC, scholars mainly conduct testing and analysis via gravity model, spatial error model, panel fixed effect model and value chain climbing theory model. FDI promotes and inhibits the division of labor status in GVC through value chain embeddedness enhancement effect and low-end lock-in effect of foreign intermediate product inflow[25]. It is found that the academic circles mainly put forward the following two research viewpoints.

4.2.1Positive impact of FDI on the division of labor status in GVC. At the macro level, scholars quantify the positive technology spillover effect of FDI and believe that it can promote the upgrading of GVC. Zhang Zhongyuan[4]used gravity model to study the influence of FDI restrictions on the construction of GVC, and empirical evidence showed that the increase of restrictions on FDI would significantly reduce the degree of vertical specialization of export products and hinder the upgrading of a country’s GVC status. Li Zongming and Gao Xingmin[26]established the spatial error model, and the empirical analysis showed that foreign capital played a significant role in promoting the status of GVC. Lin Xuejun and Zhang Wenfeng[6]used the panel fixed effect model, and the empirical analysis demonstrated that FDI had a significant positive impact on GVC status. However, how FDI promotes the status of GVC still needs to be analyzed from the industry level. Therefore, Li Qiang and Zheng Jianghuai[27]proposed the hypothesis that FDI had a positive role in promoting value chain climbing of manufacturing industry by establishing a theoretical model of value chain climbing, and the empirical results were in line with expectations. The positive effects of FDI on the GVC status of manufacturing industry are mainly as follows: first, FDI flows into knowledge- and technology-intensive industries, prompting transnational corporations to absorb more highly skilled labor and to improve their GVC status while improving the labor force structure[28]; second, the inflow of FDI will increase the capital input of manufacturing industry in the home country, and further expand the manufacturing production scale to attract more multinational companies to join in, so that the manufacturing production will include high value-added chain links, and finally realize the climb of GVC status[25]; third, FDI acts on GVC through technology spillover effect.

4.2.2Negative impact of FDI on the division of labor status in GVC. There are two main reasons. One is that FDI hinders the improvement of the technical level of the home country, for example, the competition effect of imported intermediate products will also hinder the improvement of the position of manufacturing industry in GVC[29]. The other is the hollowing out of industries brought by FDI. For example, Sang Baichuanetal.[30]found that FDI in developed countries would lead to industrial hollowing in the home country. Liu Haiyun and Nie Fei[31]put forward that industrial hollowing out of FDI leads to the decline of the competitiveness of the home country. Taking the manufacturing industry as an example, the negative effects of FDI on the GVC status of manufacturing industry mainly include the following aspects. First, FDI flows into industries with relatively scarce manufacturing industry, which is weakly correlated with upstream and downstream enterprises and can not form a complete industrial chain, and thus has limited impact on the improvement of the GVC status of manufacturing industry. Second, FDI can promote industrial upgrading in the early stage, but with the improvement of industrial upgrading, there is a U-shaped relationship between FDI and GVC status[32]. Third, FDI flows to labor-intensive industries in the host country, which tends to make manufacturing industry in the home country fall into a low-end lock-in dilemma[33].

5 Literature review

The organic combination of FDI and GVC has made a great breakthrough and provided a new research direction for the promotion of GVC, which is embodied in the following aspects. First, studies have proved that FDI is an important factor to enhance the GVC status from multiple perspectives, which is an expansion of the path for enhancing GVC status. Second, existing literature provides new ideas for comprehensively controlling the relationship between FDI and GVC status, which is reflected in different influences of FDI with different investment motivations on GVC status of manufacturing industry. Third, the improvement of the GVC status of the home country and the host country through FDI will be affected by different factors. Specifically, FDI will affect the GVC division status of the home country through resource allocation efficiency, reverse technology spillover effect, industrial hollowing and other ways. Meantime, FDI influences the GVC division status of the host country by changing its technology.

The deficiency of existing studies is that most of them focus on the motivation of FDI or the relationship between foreign investment and economic development, and the combination of FDI and GVC status promotion has not been thoroughly studied. In addition, further research is needed to distinguish the improvement of GVC status of the host country and the home country by FDI. Future research may make breakthroughs in the following aspects. First, FDI in developing and less developed countries is more susceptible to the influence of domestic and foreign institutions. If these countries actively absorb foreign investment, the improvement of the quality of FDI will help them change their unfavorable international trade environment, facilitate their integration into the GVC and gain more trade benefits. Second, the proposal of "the Belt and Road initiative" has brought opportunities for FDI. Bilateral or multilateral research on FDI can make FDI better serve "the Belt and Road Initiative" strategy, better integrate into the GVC and improve its status.