Determinants of foreign direct investment location in China

Abstract

The objective of this study was to empirically investigate the determinants that drive the foreign direct investment (FDI) distribution in China on regional level during 1998-2008 from fifteen sampling provinces, through the extensive literature review, as well as through four econometric analysis tools including the ordinary least square method, fixed effects model, random effects model and fixed effects model with interactive terms. This study examined eight potential determinants including 1) Provincial GDP, 2) Provincial trade openness, 3) Provincial transportation infrastructure, 4) Provincial educational level, 5) Provincial disposable income per capita, 6) Interest rate, 7) Exchange rate and 8) Inflation rate. Empirical findings indicted that 1) China’s market size (proxied by GDP) was a significant determinant for FDI inflow in China as a whole, which is in line with both theoretical framework and previous empirical studies. Regionally, market size positively impacts on FDI inflow in both eastern and central regions while it slightly reduces the attractiveness of western region as a FDI destination. The results implicitly indicate that most of the FDI in eastern and central regions are marketseeking FDI while it was possible that most of the FDI in western regions are sourceseeking FDI; 2) Trade openness played a key role on attracting FDI inflow in general. Regionally, it also positively impacted on FDI inflow in eastern region while having no effect on FDI of central and western regions; 3) Unexpectedly, transportation infrastructure had negative effects on MNEs’ investment decision in general. Regionally, it also had a negative impact in eastern region, a positive impact in Western region and has no effect on central region; 4) Educational levels had positive effects on the decision makings of the foreign investors on both country level and regional level; 5) Disposable income per capita was not significant in attracting FDI inflows; 6) Interest rate was not significant in attracting FDI inflow; and 7) inflation rate was not significant in attracting foreign investors as well, whereas 8) exchange rate positively impacted on FDI inflow on both country level and regional level. It is expected that the empirical results of the study would be useful for both state and regional government make proper FDI promotion policies adjustments.