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Foreign direct investment, regional market conditions and regional development

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  • Mei Wen

Abstract

This paper uses regional panel data to investigate the mechanism whereby foreign direct investment (FDI) has contributed to China's regional development through quantifying regional marketization levels. 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 have varied across east, central and west China since the second half of the 1990s, depending on differences in FDI orientation between different regions. In east China, geographical advantage in exports attracts FDI inflow and FDI promotes exports. In addition, the rise of the FDI-GDP ratio increases east China's share in national industrial value added. 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 on regional export orientation in central China weakens its contribution to regional income growth. Furthermore, the contribution of the improvement in the market mechanism to regional development is evidenced in attracting FDI, in promoting export and directly contributing to regional income growth. Copyright (c) 2007 The Author Journal compilation (c) 2007 The European Bank for Reconstruction and Development.

Suggested Citation

  • Mei Wen, 2007. "Foreign direct investment, regional market conditions and regional development," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 15(1), pages 125-151, March.
  • Handle: RePEc:bla:etrans:v:15:y:2007:i:1:p:125-151
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    3. Kim, Dong-Hyeon & Lin, Shu-Chin & Suen, Yu-Bo, 2013. "Investment, trade openness and foreign direct investment: Social capability matters," International Review of Economics & Finance, Elsevier, vol. 26(C), pages 56-69.
    4. Ge, Ying, 2009. "Globalization and Industry Agglomeration in China," World Development, Elsevier, vol. 37(3), pages 550-559, March.
    5. repec:spr:manint:v:49:y:2009:i:4:d:10.1007_s11575-009-0004-9 is not listed on IDEAS

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