Determinants of foreign direct investment at the regional level in China

Abstract

Purpose -This paper sets out to analyze the determinants of foreign direct investment (FDI) on both the country and regional level through the extensive review of past research studies, as well as through the development of a multiple regression model for identifying key determinants of FDI at the regional level in China during the critical year of 2002. Design/methodology/approach -The development of a multiple regression model to identify statistically significant determinants of FDI by region in China. Findings -As reforms continue to take place, FDI in China has been unevenly distributed. This paper examines five potential determinants of FDI in 30 regions (including provinces, centrally controlled municipalities, and semi-autonomous regions) of China using a regression model. The specific focus is on 2002, as it is the first full year after China's accession to the World Trade Organization, and the first year in which China exceeded the USA in attracting FDI. From this initial study, one can conclude that the government should consider encouraging capital-intensive FDI through the further development of a skilled workforce. This means increasing funding for higher education, and infrastructure, while also encouraging more openness in state-owned enterprises. This paper sets up further research that may help expose regions with greater potential for FDI, as well as identifying regions which need to improve certain conditions in order to receive more FDI. Originality/value -This paper analyzes the determinants of FDI by region in China in 2002. This year is particularly interesting as it is both the first full year after China's accession to the World Trade Organization, as well as the first year in which FDI was greater in China than in the USA While this research study is only a snap shot of a topic that is of increasing importance to China, it has direct relevance to the FDI development efforts of the individual regions. This study provides evidence that GDP that proxies for the market size and potential is shown to be a big attraction for FDI. Labor quality and the progress of reform or the degree of openness are also important determinants of the distribution of FDI. There is some mild evidence that high labor cost deters the inflow of FDI and the level of infrastructure has positive relation to FDI. These results have important implications for both the central and regional governments as they can be useful in helping the authorities to allocate funds and resources which will help attract FDI.

A Spatial Regression Approach to Fdi in Vietnam: Province-Level Evidence

“…The estimate is negative only in the case of labor costs. These findings are in line with OLS estimates reported by Na and Lightfoot (2006) and Cole, Elliott, and Zhang (2009) with respect to FDI across Chinese regions; and with those reported by Pham (2002Pham ( , 2008 and Nguyen (2006), Vu, Le, and Vo (2007), and Malesky (2007) with respect to Vietnamese provinces. Nevertheless, our findings enhance the evidence in three directions.…”

“…For example Na andLightfoot (2006), andDu, Lu, andTao (2008), Cole, Elliott, and Zhang (2009) Du, Lu, and Tao (2008) confirm the significance of economic institutions, wages and infrastructure; while they further add special economic zones, coastal cities to their analysis of locational determinants of US multinationals in China. Finally, Karim and Fleming (2012) find that FDI inflows in manufacturing sector across 13 states and 1 federal territory in Malaysia are responsive to market demand, labor productivity, and socio-economic development.…”

German and Austrian Foreign Direct Investment in Brazilian Regions: Which Are the Location Choice Factors?

“…Especially a cumbersome bureaucracy and a weak rule of law are deterrents to foreign investors (ibid., p. 21). A study about regional determinants of FDI in China by Na and Lightfoot (2006) found that GDP per capita and the quality of labor were statistically significant attraction factors for FDI (ibid., p. 275). For Romania, Hilber and Voicu (2007) found evidence for the strong significant influence of foreign and domestic industry-specific agglomerations and service agglomerations.…”

FDI Location Decision: Evidence from Firms Investing in China

“…Their results showed that higher effective wages foster the level of FDI as superior labor quality is usually associated with high effective wages and investors would consider investing in areas with large pools of high-quality labor forces (He, 2001). Agglomeration, measured by the infrastructure quality, refers to the concentration of economic activities that lead to positive externalities and economies of scale (Na & Lightfoot, 2006). A number of authors including www.ccsenet.org/ijbm International Journal of Business and Management Vol.…”

“…In a like vein, intellectual property rights protection was identified as a major determinant of FDI location choice in Wu (2000) and Javorcik (2004) studies. Moreover, past research has shown that market size has a positive impact on FDI inflows which tend to prove that the larger the market size of a particular region, the more FDI the region should attract (Blomstrom & Lipsey, 1991;Na & Lightfoot, 2006;Lee et al, 2008). Finally, investments in education as well as a high enrollment in high education tend to offset the disadvantages of a particular location as they help increase the pool of skilled workers and attract FDI.…”