Changing Dynamics of Foreign Direct Investment in China’s Automotive Industry

China’s automotive industry has developed dramatically in recent years as more and more major multinational corporations (MNCs) in this industry began to invest in China. Most of these investments have developed in the form of joint-ventures with Chinese state owned enterprises (SOEs). This paper contributes to the current literature by studying the effect of foreign direct investment (FDI) on the productivity of the automotive industry in China using panel data during the 1999 –2008 period. Channels through which FDI may directly and indirectly affect the productivity are investigated using pooled ordinary least squares model (POLS) and fixed effects model (FES) to estimate the influence of FDI on productivity in the automotive industry. The results suggest that FDI plays a negative role in this industry and suggests that there is a need for Chinese government to modify its policies and practices in order to improve the productivity of such a key industry in the Chinese economy.