to the observed geographical pattern of China's FDI. Still, as abundant as the literature on the geographical distribution of FDI in China is, there lacks a robust empirical analysis of the local determinants of such investment. In short, the relative importance of the various factors that influence the level of FDI in each province has yet to be established.

Our approach to shed light on this issue derives from estimation of an internal norm to assess the determinants of the provincial distribution of FDI in China using a standard location choice model. Against this norm, provincial FDI stocks are compared to determine the past performance and future potential of the provinces.

# The Dependent Variable

The dependent variable employed in our model is the accumulated stock of FDI in each province at year-end 1992.8

# The Explanatory Variables

A large volume of theoretical and empirical literature is devoted to the determinants of the spatial distribution of FDI, usually in the _inter-country_ context. This includes, among other approaches, the early Hechsher-Ohlin model, which emphasizes the endowments of capital and labor between countries; the product life cycle model, which regards FDI as a way to capture remaining profits by expanding overseas; and the industrial organization theory of FDI, which focuses on international oligopolistic competition. In the main, the empirical studies, using either cross-country regression analysis or interviews of foreign investors in host countries, generally show that various economic development characteristics (market size, labor costs, etc.) and FDI policy factors (tax incentives, free trade zones, etc.) directly influence the destination of flows of capital across national borders.<sup>9</sup> In the simple locational decision model used here, we posit that five "locational advantage" factors are important determinants of the attractiveness of a Chinese province as a potential location for FDI. Taken together, these variables represent a province's level of economic development and its overall foreign investment policy environment.

_Gross National Product._ GNP generally reflects the economic development of a country -- or in our case a province. It reflects a province's potential demand, and thus gives a good estimate of the province's market size. In this regard, GNP usually is an especially important factor for foreign investors seeking to sell as well as produce in a local market. The variable used here is provincial GNP for 1992. Our expectation is that it is positively related to a province's stock of FDI.

_Labor costs._ Foreign investors generally aim to take advantage of host countries' cheaper factor inputs (relative to their home countries), and the cost of labor is often considered important in this regard. In other words, foreign investors' display sensitivity to inter-country variations in labor costs in making their location decisions. However, the sensitivity of FDI location decisions to _intra-country_ labor cost differentials is unlikely to be as pronounced. Indeed, even though the decision to invest in China is no doubt heavily influenced by the country's prevailing low wage rate, once the choice is made to locate an investment in China, finding the cheapest possible labor _within China_ may not be an important consideration as wage differentials may not be significant. In fact, it is likely to be the case that observed wage rates (including bonuses and in-kind benefits) do not vary as much between regions within China as within other countries because of China's legacy of central planning, which has tended to homogenize 8 Although data on cumulative stocks of FDI are available for more recent years, data constraints on the other variables force us to focus on end-year 1992.

9 See, for example, Caves (1982).

7