Domestic equity control, capital accumulation and welfare: theory and China's evidence

A review of the literature reveals that the study on the impact of permitting foreign ownership in the form of joint ventures or wholly owned has been largely confined to the firm-level variables, i.e., firm output, price, revenue and profits. Nonetheless, the full ramifications of foreign ownership on macro, country-level variables, e.g., capital accumulation and economic welfare, remain by and large unexplored. The purpose of this paper is, therefore, to fill this lacuna by developing a simple framework to examine how equity controls affect accumulation of domestic assets and how the resulting assets accumulation affects outputs and national welfare. The implications of domestic equity controls on sectoral output and national welfare deduced will be tested using cross-section data for the Chinese economy. To accomplish the above objectives, we organise this paper as follows. Section 2 presents a dynamic, open economy with both domestic-owned and foreign- funded enterprises. A domestic equity requirement is imposed on foreign firms, and its impacts on the accumulation of domestic assets and welfare will then be examined. Section 3 provides an empirical study of changes in domestic assets on China's industry outputs. Section 4 offers some concluding remarks.