developed infrastructure system, and a very well educated population. Pudong New Development Area also gives Shanghai an added advantage in attracting foreign investors. Part of Shanghai's close to one billion dollar under-performance is explained by the stricter FDI screening process enforced there. Shanghai's effort in selecting only those FDI projects that bring advanced technologies but little environmental impact, has deterred potential foreign investors; but it also makes Shanghai second only to Guangdong in the number of large foreign investment industrial companies.

## **Observations**

A few conclusions can be drawn from our empirical results. First, the geographical distribution of FDI in China is mostly determined by GNP, infrastructure development, extent of general education, and coastal location. To increase the attractiveness of China's interior provinces as destinations for foreign capital, it is important for the government to develop inland infrastructure networks. Our simulation results suggest that, despite their close proximity and the special cultural links to Hong Kong and Taiwan, China, Guangdong and Fujian, as well as Hainan, may be exhausting their potential as hosts for significant amounts of FDI in the future. Although the coastal provinces are already the destination of 90 percent of all the FDI in China, our model suggests that these provinces, especially Shanghai, Zhejiang, and Hebei, will continue to be the more attractive locations for foreign investment than the inland regions in general. However, along with the moves by China to further open its domestic market and to encourage more domestic investment in the inland areas, the weight of FDI is now gradually shifting from the establishment of export processing production centers to investment with a local market orientation that is more suitable to locate in the inland provinces. Hunan and Henan stand out in particular as promising investment locations.

# **IV. SECTORAL DISTRIBUTION OF** FDI

Akin to the geographic distribution of FDI in China, the distribution of FDI across the country's industrial sectors is also skewed. This phenomenon became pronounced during the first half of the 1980s, when there was a concentration of FDI in the tourist industries, such as hotel and catering services, and more recently in real estate. Surprisingly, little effort has been made toward a rigorous quantitative analysis as to the determinants and impacts of the sectoral distribution of Chinese FDI or to put them into international perspective.

We base our analysis on data compiled by the United Nations in its World Investment Directory series. Table 10 displays the current landscape of FDI distribution by sector. The mean of the share of FDI flows into each industry is calculated for (i) the global economy as a whole, and for (ii) the developed countries, (iii) the Asian and Pacific countries, and (iv) the Latin American and Caribbean countries separately.

## **The Global Trend**

The sectoral distribution of FDI varies greatly from country to country, and from year to year. Many factors that are unique to a particular region during a particular period of time work together in determining how FDI flows into the various sectors of an economy. Table 10 shows that the sectoral distribution of FDI is quite different between the three regions. The sector that has the most uniformity is the manufacturing sector, which attracts about 42 percent of global FDI on the average. In Asia, almost half of the FDI flowing into the region is concentrated in this sector. The proportion of FDI attracted to manufacturing in Latin America and the Caribbean is the smallest among the three, although it is still the largest sectoral share of FDI in that region.

Within the manufacturing sector, data on FDI stocks are disaggregated into twelve categories. Food, beverages, tobacco, chemicals and mechanical and electrical equipment industries are those that attract the most foreign capital. The chemicals industry, in particular, has consistently commanded the most FDI in all countries, attracting around 9 percent of total national FDI accumulation. For 13