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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.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Chinese Economic and Business Studies.

Volume (Year): 9 (2011)
Issue (Month): 1 ()
Pages: 23-42

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Handle: RePEc:taf:jocebs:v:9:y:2011:i:1:p:23-42

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Related research

Keywords: China; FDI; regional distribution; factor analysis;

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Cited by:
  1. Olga Kuzmina & Natalya Volchkova & Tatiana Zueva, 2014. "Foreign Direct Investment and Governance Quality in Russia," Working Papers w0205, Center for Economic and Financial Research (CEFIR).

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