Foreign-owned enterprises, government subsidies, and unrelated diversification of manufacturing in Chinese cities

Previous research proposes that extra-regional linkages and non-firm actors might generate unrelated diversification. This article contributes to the field by testing the role of government subsidies in moderating the relationship between foreign-owned enterprises and unrelated diversification of manufacturing in Chinese cities. Using high-dimensional fixed-effect models for panel data in 1999–2012, this article finds that foreign-owned enterprises promote the development of unrelated new industries, and government subsidies strengthen the promotive effect. Heterogeneity analysis shows that the moderating role of government subsidies is significant for enterprises of the western countries, but is insignificant for enterprises from China's Hong Kong, Macau, and Taiwan regions, and that the promotive effect of foreign-owned enterprises is significant in East China, but insignificant in Central and West China. These findings highlight the role of foreign-owned enterprises and local governments in shaping unrelated diversification in developing countries.