Running out of steam? A political incentive perspective of FDI inflows in China

Drawing on the sociological literature of state bureaucracy, we develop a political incentive perspective on FDI inflows. We argue that political term, as a core feature of career advancement in state bureaucracy, influences the incentives of newly appointed government officials and in turn their efforts toward achieving the state’s goal of attracting FDI. Due to the mandatory retirement age which limits the career advancement, officials in their first terms perceive that they have better chances of promotion and hence have stronger incentives to work toward advancement than those continuing to serve in the current position for the following term. We test this argument by examining Chinese city government leaders and FDI inflows in their cities from 2003 to 2010, using a difference-in-differences design. The results show that first-term leaders, who are newly appointed after political turnover, attract more FDI inflows than continuing leaders. The difference is smaller when the new leaders are close to retirement, but greater if they are appointed to cities with low prior GDP performance. This study offers a new perspective on intra-country FDI variations, and extends the literature on the role of political institutions by investigating the political incentives of government officials.