Determinants and impact of foreign direct investment in China : a national and regional analysis

Since the late 1970s, the Chinese economic system has experienced a series of economic reforms, which include attracting foreign direct investment and the liberalisation of Chinese international trade. Due to the successful reform, China has experienced a 30 year economic growth. Previous empirical studies found the positive effect of FDI in the Chinese economic development.

This study plans to investigate the factors which attract the investment to China and the impact of the inward FDI on international trade and Chinese economic development under the geographic location condition.

OLI model has emphasis the location effect in motivated FDI flows. The first research question is the determinant of FDI in China with concerning the geographic effect. Different with the previous empirical paper on the FDI determinants in China, the using the geographic effect as an dummy variable in the specification, this study investigate the effect of the other determinant under different geographic background. The geographic effect has been explore in two levels: national level and regional level. On national level, there are two countries have been selected as research samples: the investment from the U.S. and the investment from Japan. These two countries have similar economic size and FDI stock in China but have different geographic relationship with China. Through the ARDL research approach, this study finds that the key drivers of inward investment are relative wages, relative capital cost, market size and net exports, although the source of these FDI flows is also found to be important especially those from the USA and Japan. The determinants of FDI from the US and Japan have different effect. International trade has negative effect of export from US to China on the US FDI stock in China, while it has positive coefficient of the exports from Japan to China on the Japanese FDI. The large market size would drive the FDI from US but reduce the FDI from Japan. The geographic effect influences the motivation of FDI (Helpman 1984, Cushman 1988). This further lead the determinants has different effect.

The study on regional FDI divided the Chinese provinces in two subgroups: the eastern coastal area and the western hinterland. The eastern area has more than 80% of FDI in China. The eastern coastal has rich resource in the transportation, openness, physical and human capital. The west hinterland area has cheaper labours. However, the result shows that the competition in the sub-regions are determined by it scare resources. Cheaper wage is the key factor to attractive the investment to the east regions. While the technology, human capital and economy openness is the key factors to determine the FDI stock in the west hinterland. 

The second research question is the impact of FDI on international trade. Chapter 6 investigates the plausibility of FDI driving trade. The granger causality test has been applied to test the endogenity between international trade and FDI stock in China, the results does not support the causality. The further regression results show that this model is not substantiated by the data, so the maintained hypothesis that FDI is the dependent variables seems to be appropriate for China. 

The third contribution is to examine the effects of FDI on economic growth. In this panel data analysis the impact of FDI on the regions of the country is examined. Furthermore, the impact on the sub-regions groups has also been explored. The results show that economy of the east coastal area in China is motivated by the inward FDI stock. However, due to the limitation of the catch-up capability, FDI has negative effect on the development of the hinterland in China. The hinterland economy is driven by the international trade, although the transportation resource in the hinterland is not as rich as ones in the eastern coast.