China’s domestic business environment and its impact on trade in services: an empirical analysis

Abstract

China’s trade in services has increased rapidly since 2005 (Wu, 2015). The expanded trade in services has contributed to the performance of China’s overall trade, and enhanced China’s status in the international trade arena (Tang, Zhang, & Findlay, 2013). The importance of the trade in services in China’s economic development has been recognized and emphasised in China’s Twelfth Five-Year Plan (2011-2015) (Chen & Whalley, 2014). The Chinese government aims to continue to increase the share of its services sector to GDP to 55 percent in 2020 (Gardels, 2016). China’s integration into the world services market will not only impact on China’s own economic development, but also have influence on the global economy.

Although China’s trade in services has expanded substantially, China’s services sector and trade in services has received less attention when compared to the expansion of China’s manufacturing sector and its merchandise trade (Wu, 2015). A review of literature shows that the published empirical studies on China’s trade in services are sparse. To date, there is no published empirical research on analysing the relationship between the indicators of the domestic business environment and China’s trade in services, specifically, China’s services exports and imports.

This current research identifies a set of testable national level indicators of the domestic business environment in a Chinese context, and empirically investigates the effects of these indicators of the domestic business environment on China’s trade in service. The identified five testable indicators are foreign direct investment (FDI), tertiary education, the employment in the services sector, inflation, and the Internet diffusion. This research employs structural equation modelling to examine the relationships between the selected five indicators of the domestic business environment on China’s trade in services (especially, on China’s service exports and service imports). The empirical results of this research reveal that FDI is the most significant indicator that impacts on the development of both China’s services exports and services imports. In addition, Internet diffusion has the least impact on China’s service exports, while, employment in the service sector has the least impact on China’s services imports.

The current research makes both a theoretical and practical contribution to future research. This research contributes to the economic literature on the trade in services as it is the first empirical research that identifies and examines the national level indicators of the Chinese domestic environment on its trade in services. The multiple regression modelling and the identified set of testable national level of indicators of the domestic business environment can be applied to the future research for different countries and regions. Further, the empirical findings in this research provide an improved understanding of the important linkage between China’s domestic business environment and its trade in services.