Three essays on international trade and industrial policies
Xuan LUO
10.25440/smu.12310121.v1
https://researchdata.smu.edu.sg/articles/thesis/Three_essays_on_international_trade_and_industrial_policies/12310121
<table><tr>
<td><p>This
dissertation consists of three chapters related to international trade and
industrial policies.</p>
<br>
<p>The first chapter establishes that international trade and the
market size affect institutional quality positively. Institutions, such as
contract enforcements and rule of law, are arguably one of the most important
determinants of economic development. I adopt an incomplete-contract approach
to model institutions. Due to contract incompleteness, a firm can hold up its
suppliers and distort production. When the effective market size facing firms
is larger, due to trade liberalization, or increases in population or numbers
of trading partners, benevolent governments have incentive to improve
institutional quality to facilitate production to meet the larger demand.
Interestingly, in my multiple-country framework, the competition in
institutional quality also matters in a Nash-equilibrium sense. Institutional
quality increases in trade-liberalized countries whereas those in the
non-liberalized ones may decrease. This chapter also empirically shows the
positive impact of real effective market size on institutional quality,
supporting the model.</p><br>
<p>The second chapter finds that foreign direct investment (FDI)
affects China’s industrial agglomeration negatively by utilizing the
differential effects of FDI deregulation in 2002 in China on different
industries. This result is somewhat counter-intuitive, as the conventional
wisdom tends to think that FDI attracts domestic firms to cluster around them
for various agglomeration benefits, technological spillovers in particular.
To reconcile our empirical findings and the conventional wisdom, we develop a
theory of FDI and agglomeration based on two counter-veiling force.
Technology diffusion from FDI attracts domestic firms to be around them, but
fiercer competition drives firms away. Our theory indicates that which force
dominates depends on the scale of the economy. When the scale of the economy
is sufficiently large, FDI discourages agglomeration. We find various
evidence on this competition mechanism.</p><br>
<p>The third chapter studies the Chinese industrial subsidy policy
from 1998 to 2007. Our industry equilibrium model establishes that the
optimal policy should be positively correlated with various input distortions
confronting firms. Based on this prediction, we evaluate the effectiveness of
subsidy policy in China and document four stylized facts: (1) The efficiency
of subsidy policy in China has grown by around 50% over the ten years, with a
notable increase at the ascendance of Hu Jingtao into presidency; (2) Subsidy
policy tends to have differential efficiency effect on the sector level, with
more downstream sectors experiencing higher efficiency; (3) Provinces in the
‘Western Development Program’ received more subsidies compared to their
eastern counterparts; (4) Labour and materials distortions have been properly
corrected in the western regions, and materials distortion can explain most
of the variation of subsidies in China. Finally we quantify the effect of the
policy on welfare.</p><p><br></p><table><tr>
<td><p>The
dissertation comprises 3 papers, the following are available as working
papers:</p><br>
<p>1. <a href="https://ssrn.com/abstract=3361492" target="_blank">Market Size, International Trade, and Institutional
Quality. 2019. Working paper</a>.</p>
<br>
<p>2. <a href="https://ink.library.smu.edu.sg/soe_research/2306/" target="_blank">Does foreign direct investment lead to
industrial agglomeration? 2019. Working paper</a>.</p></td></tr></table></td></tr></table>
2020-05-15 08:46:59
International trade
FDI
Industrial policies
subsidy
Agglomeration
Industrial quality
International Economics and International Finance