Industrial Policy and Investment Networks in the US-China Trade War

• In Event: Chinese Politics Mini-Conference: Firms, Industries, and China's (International) Political Economy

Abstract

As the business environment sours in China, why do some foreign investors decide to exit while others choose to stay? While international factors such as international agreements buffer firms from increased political risks in a trade war, how does the local political-economic context affect firms’ decisions to exit? Vortherms and Zhang (2021) show that the US-China trade war broadly elevated political risks for multinational corporations (MNCs) operating in China, increasing firm exit overall but not necessarily in sectors facing higher tariffs. In this paper, we investigate the impact of the domestic political economy on MNC exits after the outbreak of the trade war. Specifically, we test two concurrent hypotheses: local industrial policies and investment agglomeration. We argue that local officials use protective policies to undercut the costs introduced by the trade war to maintain existing foreign contracts, which decreases the costs of weathering the costs of the trade war. Simultaneously, networked agglomeration of foreign capital, where foreign firms are integrated in a local market of foreign capital, increases the costs of exiting. Firms both located in districts with preferential policies, such as economic development zones, and integrated with locally networked foreign capital will be the least likely to exit. We add to existing studies of comparative political economy of foreign investment by adding highly detailed political geography variables to understand the spatial variation in firm exits during the unprecedented trade war between the US and China.

Authors

• Jiakun Zhang, University of Kansas

• Samantha Vortherms, University of California, Irvine

• Kyle Alan Jaros, University of Notre Dame