wage rates.'" Thus, while the provinces with higher labor costs can be expected to compete less favorably in their efforts to attract foreign investment, our expectation is that this variable is not likely to yield a strong negative relationship with provincial FDI accumulation. The measure of labor cost we use is the average annual provincial wage of staff and workers in 1992.

_Human capital._ A host region's labor supply influences foreign investors' location decisions not only in terms of input costs, but also through the quality of the skills of the laborforce--especially if the price mechanism is repressed, as is the case in China's labor markets. All other things equal, locales with highly skilled workers--most easily measured by education levels--would be expected to compete more favorably than others in their FDI attractiveness. In this study, adult illiteracy is taken to represent the extent of basic education of a province's workers. The data are taken from China's Fourth National Population Census in 1990, where the population is classified as illiterate and semi-illiterate. These two classifications are divided by provincial population "up to age 6" and "over age 6" to obtain an illiteracy ratio.

_Infrastructure._ There is no dispute that the extent of an area's infrastructure development is important in an investor's location choice. Infrastructure of course covers many dimensions, ranging from highways to railroads to telecommunication systems to even institutional development (e.g., extensiveness of business-related services, such as accounting, legal services, etc.). Owing to the difficulty of capturing all these various dimensions in an easily calculable variable, for this study we settled on using as a measure of a province's infrastructure development the total length of transportation routes within the province, calculated as the sum of the length of the (i) railways in operation, (ii) the navigable inland waterways and (iii) the constructed highways in 1992, normalized by provincial geographical size. In effect this variable measures provincial transportation route density. It is expected to be positively related to the level of FDI stock.

_Geographica_ **_l_** _ocation._ As in other countries, another factor that is likely to be an important determinant of the geographical distribution of FDI in China is whether a province has a coastal location and thus in close proximity to major shipping ports. In China, coastal location may also be important because of the government's FDI policy regime--namely that fiscal incentives for foreign investors, such as lower income tax rates and reduced tariffs for imports used in the production of exports, have been heavily slanted in favor of cities along the coast. Although as the empirical literature shows (as noted above) such incentives only marginally affect FDI decisions in other countries, it would be helpful to assess their effects in the Chinese context. But this is impossible in our case given the unavailability of data on the other explanatory variables: SEZs (or other similar tax preference units) are not jurisdictions on which GNP, illiteracy, labor costs and infrastructure development are measured; hence our unit of analysis is the province. We thus use a dummy variable to reflect coastal location; for this variable the twelve coastal provinces take on the value 1, while others 0. This variable is expected to be positively related to a province's FDI accumulation.

The above discussion regarding the determinants of FDI within China on a provincial basis can be summarized by the following equation, with the expected signs under each explanatory variable:

# FDI = _f (_ GNP, Wage, Infrastructure, Illiteracy, Coastal Location)

+ -+ -+ 10 To be sure, regional wage differentials within China have become somewhat pronounced with reform, which began in 1978 and has intensified in recent years. Indeed, the "iron rice bowl" or "small society" regimes embodied in Chinese state owned enterprises, which provide cradle-to-grave jobs and a complete package of social benefits for workers, their spouses and other family members, have acted as barriers to labor migration among provinces and allowed the modest (but growing) provincial wage differences to persist. See Hu in Broadman (1996).

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