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Is China's FDI coming at the expense of other countries?

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  • Eichengreen, Barry
  • Tong, Hui

Abstract

We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI. We do so using an approach that accounts for the endogeneity of China's FDI. The impact turns out to vary by region. China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. For whatever reason -- limits on their ability to raise finance for investment in multiple markets or limits on their ability to control operations in diverse locations -- firms more inclined to invest in China for this reason are corresponding less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 21 (2007)
Issue (Month): 2 (June)
Pages: 153-172

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Handle: RePEc:eee:jjieco:v:21:y:2007:i:2:p:153-172

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Web page: http://www.elsevier.com/locate/inca/622903

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  1. Benoît Mercereau, 2005. "FDI Flows to Asia," IMF Working Papers 05/189, International Monetary Fund.
  2. Blonigen, Bruce A. & Davies, Ronald B. & Waddell, Glen R. & Naughton, Helen T., 2007. "FDI in space: Spatial autoregressive relationships in foreign direct investment," European Economic Review, Elsevier, vol. 51(5), pages 1303-1325, July.
  3. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," IDB Publications 6466, Inter-American Development Bank.
  4. Mody, Ashoka & Razin, Assaf & Sadka, Efraim, 2002. "The Role of Information in Driving FDI: Theory and Evidence," CEPR Discussion Papers 3619, C.E.P.R. Discussion Papers.
  5. Warwick J. McKibbin & Wing Thye Woo, 2003. "The Consequences of China's WTO Accession on its Neighbors," Departmental Working Papers 2003-17, The Australian National University, Arndt-Corden Department of Economics.
  6. Vincent Palmade & Andrea Anayiotas, 2004. "FDI Trends : Looking Beyond the Current Gloom in Developing Countries," World Bank Other Operational Studies 11259, The World Bank.
  7. di Giovanni, Julian, 2005. "What drives capital flows? The case of cross-border M&A activity and financial deepening," Journal of International Economics, Elsevier, vol. 65(1), pages 127-149, January.
  8. Alan Ahearne & John Fernald & Prakash Loungani & John Schindler, 2003. "China and emerging Asia: comrades or competitors?," Working Paper Series WP-03-27, Federal Reserve Bank of Chicago.
  9. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
  10. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-93, May.
  11. James E. Anderson & Douglas Marcouiller, 2002. "Insecurity And The Pattern Of Trade: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 342-352, May.
  12. Henisz, Witold J, 2000. "The Institutional Environment for Multinational Investment," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 334-64, October.
  13. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
  14. Barry Eichengreen & Yeongseop Rhee & Hui Tong, 2004. "The Impact of China on the Exports of Other Asian Countries," NBER Working Papers 10768, National Bureau of Economic Research, Inc.
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