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Foreign Direct Investment, Regional Geographical and Market Conditions, and Regional Development: A Panel Study on China

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  • Mei Wen

Abstract

This paper uses regional panel data to investigate the mechanism of how FDI has contributed to China’s regional development through quantifying regional marketization level. It is found that FDI inflow generates a demonstration effect in identifying regional market conditions for investment in fixed assets and hence affects industrial location. In addition, its effects on regional export and regional income growth varied across east, central and west China since the second half of the 1990s, depending on FDI-orientation in different regions. In east China, geographical advantage in export attracts FDI inflow and FDI promotes export. In addition, rise of FDI-GDP ratio increases regional share in industrial value added in east China. These effects contribute positively to regional income growth in east China although there is a direct crowding out effect between FDI and domestic investment (as input) in growth. In contrast, the negative impact of FDI inflow in central China on regional export orientation weakens its contribution to regional income growth. Furthermore, contribution of improvement of market mechanism to regional development is evidenced in attracting FDI, in promoting export and directly contributing to regional income growth.

Suggested Citation

  • Mei Wen, 2005. "Foreign Direct Investment, Regional Geographical and Market Conditions, and Regional Development: A Panel Study on China," Departmental Working Papers 2005-12, The Australian National University, Arndt-Corden Department of Economics.
    • Handle: RePEc:pas:papers:2005-12
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    More about this item

    Keywords

    Export-oriented FDI and import substitute FDI; marketization; industrial location; and regional growth;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • P52 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Studies of Particular Economies
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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