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The interaction between domestic and outward foreign direct investment in China: The influence of region-specific context

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  • David W H Wong
  • Simon X B Zhao
  • Will W Qiang
  • Harry F Lee

Abstract

Since the Chinese government launched the Belt and Road Initiative, state-owned enterprises and private conglomerates have increased overseas investment. The massive outward foreign direct investment (OFDI) profoundly affects China’s regional development to varying degrees. Existing studies have mainly investigated the effect of foreign direct investment inflow on domestic investment (DI), but only a few studies have examined the impact of OFDI on DI. Though most researchers have indicated that OFDI activities can promote (or inhibit) DI in a particular country, they have overlooked how OFDI’s geographical distribution and motivation across the Chinese macro-regions have influenced DI. To fill these gaps, this paper examines the impact of such OFDI on DI in China and its macro-regions, using a province-level dataset from 2005 to 2021. It employs panel regression and rigorously tests the data using the generalised method of moments to address endogeneity issues. We also investigate the investment motivations of the top 100 Chinese multinationals with significant FDI outflows from 2015 to 2018. We find that OFDI has positively and markedly influenced DI in eastern coastal and central inland regions but not in western China. Though OFDI has positively affected DI in China, it may not hold in a regional context. Such OFDI seeks to enhance the efficiency of existing investment, expand domestic markets, and look for strategic assets. Our findings indicate that central and provincial governments could develop OFDI policies to cater to significant regional variations. Local governments should also consider the various OFDI motivations of Chinese multinationals and provide adequate support for developing and implementing local investment policies that encourage domestic firms to invest abroad.

Suggested Citation

  • David W H Wong & Simon X B Zhao & Will W Qiang & Harry F Lee, 2024. "The interaction between domestic and outward foreign direct investment in China: The influence of region-specific context," PLOS ONE, Public Library of Science, vol. 19(11), pages 1-18, November.
    • Handle: RePEc:plo:pone00:0314109
    DOI: 10.1371/journal.pone.0314109
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    References listed on IDEAS

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    1. Michael Dunford & Weidong Liu, 2019. "Chinese perspectives on the Belt and Road Initiative," Cambridge Journal of Regions, Economy and Society, Cambridge Political Economy Society, vol. 12(1), pages 145-167.
    2. Peter J Buckley & L Jeremy Clegg & Adam R Cross & Xin Liu & Hinrich Voss & Ping Zheng, 2007. "The determinants of Chinese outward foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 38(4), pages 499-518, July.
    3. Yaya Su & Zhenghui Li & Cunyi Yang, 2021. "Spatial Interaction Spillover Effects between Digital Financial Technology and Urban Ecological Efficiency in China: An Empirical Study Based on Spatial Simultaneous Equations," IJERPH, MDPI, vol. 18(16), pages 1-27, August.
    4. You, Kefei & Solomon, Offiong Helen, 2015. "China's outward foreign direct investment and domestic investment: An industrial level analysis," China Economic Review, Elsevier, vol. 34(C), pages 249-260.
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