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What Explains the Boom of Foreign Direct Investment in China?

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Abstract

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.

Suggested Citation

  • Zhang , Kevin Honglin, 2001. "What Explains the Boom of Foreign Direct Investment in China?," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 54(2), pages 251-274.
  • Handle: RePEc:ris:ecoint:0221
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    References listed on IDEAS

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    1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Iamsiraroj, Sasi, 2016. "The foreign direct investment–economic growth nexus," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 116-133.
    2. Iamsiraroj, Sasi & Doucouliagos, Hristos, 2015. "Does growth attract FDI?," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 9, pages 1-35.
    3. Iamsiraroj, Sasi & Doucouliagos, Hristos, 2015. "Does growth attract FDI?," Economics Discussion Papers 2015-18, Kiel Institute for the World Economy (IfW).
    4. Steven Globerman & Daniel Shapiro, 2003. "Governance infrastructure and US foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 34(1), pages 19-39, January.

    More about this item

    Keywords

    Vertical and Horizontal Foreign Direct Investment; Location Advantages;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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