What Explains the Boom of Foreign Direct Investment in China?
This study first provides several extraordinary characteristics of the boom of foreign direct investment (FDI) fiows into China. These include the massive predominance of investment from Asian developing economies, especially Hong Kong, and the different sectoral and geographical distributions of FDI from developing Asia and developed Western countries. Based on these facts and the relevant theoretical considerations, a relative-demand model is specified and estimated with time series data. The model (a) formulates China’s location advantages relative to other developing countries, and (b) distinguishes between Asian and Western FDI. The estimates indicate that China’s large market size, liberalized FDI policies, and political stability are attractive to both types of FDI. While Asian investors seem to be motivated largely by China’s cheap labor, Western FDI is more likely to appear for local market penetration when China’s infrastructure and human capital conditions are improved and when trade barriers are large.
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Volume (Year): 54 (2001)
Issue (Month): 2 ()
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