Using a simultaneous equations model, this paper investigates how/whether the presence of foreign direct investment (FDI) affects the performance of local firms in China's (1) leather shoe manufacturing and (2) textile and garment manufacturing industries. We use the value of sales (total revenue) as a measure of firm performance in domestic and export markets. The distinguishing feature of this paper is the use of an FDI presence measure that takes the regional dimension into account. The empirical analysis presented in this paper reveals that the presence of FDI leads to a significant positive impact on the domestic sales and export intensity of local firms in both industries. This result is found to be robust to alternative measures of FDI. Based on the result, it is recommended that, in order to maximize the benefits from inward FDI, Chinese policy-makers must encourage domestic and foreign-invested firms to locate in close geographical proximity.
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