The Location Determinants of Foreign Direct Investment in Developing Countries

Using an econometric regression analysis to test the hypotheses based on the location advantages of the theory of FDI, this paper investigated and answered two main questions: what are the location determinants of FDI inflows into developing countries and what is the relative performance of China in attracting FDI inflow as compared with other developing countries in general and as compared with its Asian neighbouring countries in particular? First, the study shows that given the ownership advantages and the internalisation advantages of the source countries, the location advantages of host countries are very important in determining the distribution of the magnitude of FDI inflows. Second, the regression results provided strong support for the acceptance of the hypotheses. The main findings are: countries with larger market size, faster economic growth, higher per capita income, a higher level of FDI stock and more liberalised trade policies represented by a higher degree of openness attracted relatively more FDI inflows, while higher efficiency wages and greater remoteness from the rest of the world deterred FDI inflows. Third, by using the statistical model as an empirical norm, the study found that China's relative performance in attracting FDI inflow was only at a level moderately above average both among the developing countries and among the East and South-East Asian countries. Therefore, despite the fact that China is the largest FDI recipient among the developing countries and has attracted a large amount of FDI inflow in absolute dollars, in terms of its huge market size, fast economic growth, low labour costs and other economic and geographical characteristics, China received only its fair share of FDI inflows into developing countries, or at most marginally more than its potential from 1987 to 1994.