Signaling and FDI: Evidence from the international mega-events in China

This paper explores the impact of signaling on foreign direct investment (FDI) by leveraging international mega-events hosted in China as a quasi-natural experiment. The study finds that hosting international mega-events increased FDI in non-host cities within the host provinces. As the FDI inflows to non-host cities could not be attributed to hosting, signaling emerged as a crucial determinant. Successful hosting could also be regarded as signals sent by the host provinces. The effect was stronger in cities with higher levels of openness, earlier establishment of administrative approval centers, and a greater number of foreign-invested enterprises. Moreover, increased hosting costs corresponded to greater inflows of FDI. The augmented FDI predominantly originated from non-HKMT (Hong Kong, Macao, and Taiwan) foreign firms rather than HKMT foreign firms, and was mainly channeled into wholly foreign-owned firms rather than Sino-foreign joint ventures. Notably, the surge in FDI was not synchronous with improvements in the business environment. Conversely, the sustainable enhancements in the business environment before hosting did not result in a significant increase in FDI. This anomaly suggests that foreign investors remained unaware of the improved business environment unless the local governments signaled through international mega-events.