Foreign investment and vertical specialisation: Emerging trends in Chinese exports

This paper contributes to the debate about the role of foreign direct investment (FDI) in vertical specialisation in Chinese exports. Globalisation of the world economy, together with well‐developed physical infrastructure, and falling costs of transport and communications, has led to a significant increase in foreign investment into China to take advantage of its comparative advantage in labour‐intensive activities. Initially, foreign investment came to simple assembly line (such as textile, clothing, electronic goods), but gradually, China attracted FDI to sophisticated manufacturing industries (such as, information and communications technology products, office and medical equipments etc.). As China became increasingly open following its accession to the World Trade Organisation, the share of vertical specialisation in its exports appears to have increased. Over one‐quarter of Chinese exports appears to be due to the expansion of back‐and‐forth transactions in vertically fragmented cross‐border production process, which has significant implications for policy formulation.