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Regional determinants of FDI in China: a factor-based approach

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  • Martijn Boermans
  • Hein Roelfsema
  • Yi Zhang

Abstract

We empirically investigate the factors that drive the uneven regional distribution of foreign direct investment (FDI) across Chinese provinces from 1995 to 2006. We first perform a factor analysis to summarize information embodied in around 40 variables and derive four FDI determinants: 'institutional quality', 'labour costs', 'market size', and 'geography'. Applying these estimated factors, we then employ instrumental variable (IV) estimation to account for endogeneity. In line with theoretical predictions, we find that foreign firms invest in provinces with good institutions, low labour costs, and large market size. The Arellano-Bond dynamic panel generalised method of moments (GMM) results show strong agglomeration effects that multinationals tend to invest in provinces which attract other foreign firms, consistent with the economic geography literature. Several robustness tests indicate that low labour costs combined with improvements in institutions are the key for attracting FDI in China.

Suggested Citation

  • Martijn Boermans & Hein Roelfsema & Yi Zhang, 2011. "Regional determinants of FDI in China: a factor-based approach," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 9(1), pages 23-42.
    • Handle: RePEc:taf:jocebs:v:9:y:2011:i:1:p:23-42
    DOI: 10.1080/14765284.2011.542884
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    Cited by:

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    2. Wei Feng & Yanrui Wu & Yue Fu, 2021. "Dialect Diversity and Foreign Direct Investment in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 29(2), pages 49-72, March.
    3. Hongzhong Fan & Shah Muhammad Kamran & Mingliang Li & Qiliang Zhou, 2017. "Congestion costs and differences in the regional distribution of FDI in China," Quality & Quantity: International Journal of Methodology, Springer, vol. 51(4), pages 1789-1809, July.
    4. Kuzmina, Olga & Volchkova, Natalya & Zueva, Tatiana, 2014. "Foreign direct investment and governance quality in Russia," Journal of Comparative Economics, Elsevier, vol. 42(4), pages 874-891.
    5. Jr-Tsung Huang & Ming-Lei Chang, 2018. "Fiscal Transparency And Foreign Direct Investment In China," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 63(04), pages 839-859, September.
    6. Romana Korez-Vide & Patrick Voller & Vito Bobek, 2014. "German and Austrian Foreign Direct Investment in Brazilian Regions: Which Are the Location Choice Factors?," Journal of Management and Strategy, Journal of Management and Strategy, Sciedu Press, vol. 5(4), pages 68-81, November.
    7. Eduardo Polloni-Silva & Guilherme Augusto Roiz & Enzo Barberio Mariano & Herick Fernando Moralles & Daisy Aparecida Nascimento Rebelatto, 2022. "The Environmental Cost of Attracting FDI: An Empirical Investigation in Brazil," Sustainability, MDPI, vol. 14(8), pages 1-14, April.
    8. Taxiarchis Delis & Dimitrios Kyrkilis, 2017. "Locational Concentration of Foreign Direct Investment in China: a Cluster Factor-Based Analysis," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 8(4), pages 1115-1132, December.
    9. David A. Ralston & Carolyn P. Egri & Charlotte M. Karam & Yongjuan Li & Ping Ping Fu, 2018. "Changes in work values across the regions of China," Asia Pacific Journal of Management, Springer, vol. 35(1), pages 145-179, March.
    10. Yao, Yao & Chen, George S. & Zhang, Lin, 2021. "Local financial intermediation and foreign direct investment: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 198-216.
    11. Aniela Raluca Danciu & Vasile Alecsandru Strat, 2015. "Labor Force – Main Determinant Of the Foreign Direct Investments Located in Romania," Romanian Statistical Review, Romanian Statistical Review, vol. 63(1), pages 3-21, March.
    12. Ishfaq Hamid & Md Shabbir Alam & Imran Ali Baig & Pabitra Kumar Jena, 2024. "Nexus Between Institutional Quality and Foreign Direct Investment Inflows: Panel Data Analysis of SAARC Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 7993-8019, June.
    13. Villaverde, José & Maza, Adolfo, 2015. "The determinants of inward foreign direct investment: Evidence from the European regions," International Business Review, Elsevier, vol. 24(2), pages 209-223.
    14. Omar G. Aziz, 2022. "FDI inflows and economic growth in Arab region: The institutional quality channel," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1009-1024, January.
    15. Aziz, Omar Ghazy, 2018. "Institutional quality and FDI inflows in Arab economies," Finance Research Letters, Elsevier, vol. 25(C), pages 111-123.

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