Expanding Financial Openness or Enhancing Economic Efficiency: Strategies for Attracting FDI in China as Evidenced by Provincial Data

This study investigates the impact of financial openness and economic efficiency on foreign direct investment (FDI) inflows across 30 Chinese provinces from 2005 to 2019, addressing regional disparities through a variety of statistical models. Unlike previous studies that primarily focus on cross-country comparisons, this research emphasizes the nonlinear relationships between financial openness, economic efficiency, and FDI within a regionally diverse context. The findings reveal that (1) financial openness significantly boosts FDI only after surpassing a critical threshold, a level that many provinces—particularly in Central and Western China—have yet to achieve. To address this issue, these regions should prioritize financial reforms, infrastructure improvements, and the establishment of free-trade zones. (2) Economic efficiency exhibits a U -shaped relationship with FDI, indicating that only when efficiency exceeds a certain level can further enhancements substantially increase FDI inflows. This supports the “efficiency-seeking†hypothesis and underscores the importance of optimizing the business environment, advancing industrial development, and upgrading technological infrastructure. (3) Given China’s pronounced regional disparities, tailored strategies are essential as follows: Eastern regions should focus on enhancing efficiency, Central regions on expanding financial openness, and Western regions on leveraging their efficiency advantages. These findings highlight the need for decentralized and flexible policy-making to promote equitable FDI distribution and sustainable growth. By addressing the research gap on regional heterogeneity and threshold effects, this study provides valuable insights for policymakers in China and other developing economies, offering a framework for designing targeted strategies to attract FDI and foster balanced economic development.