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Regional determinants of FDI in China: a factor-based approach

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  • Martijn Boermans
  • Hein Roelfsema
  • Yi Zhang

Abstract

We empirically investigate the factors that drive the uneven regional distribution of foreign direct investment (FDI) across Chinese provinces from 1995 to 2006. We first perform a factor analysis to summarize information embodied in around 40 variables and derive four FDI determinants: 'institutional quality', 'labour costs', 'market size', and 'geography'. Applying these estimated factors, we then employ instrumental variable (IV) estimation to account for endogeneity. In line with theoretical predictions, we find that foreign firms invest in provinces with good institutions, low labour costs, and large market size. The Arellano-Bond dynamic panel generalised method of moments (GMM) results show strong agglomeration effects that multinationals tend to invest in provinces which attract other foreign firms, consistent with the economic geography literature. Several robustness tests indicate that low labour costs combined with improvements in institutions are the key for attracting FDI in China.

Suggested Citation

  • Martijn Boermans & Hein Roelfsema & Yi Zhang, 2011. "Regional determinants of FDI in China: a factor-based approach," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 9(1), pages 23-42.
  • Handle: RePEc:taf:jocebs:v:9:y:2011:i:1:p:23-42
    DOI: 10.1080/14765284.2011.542884
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    1. repec:spr:qualqt:v:51:y:2017:i:4:d:10.1007_s11135-016-0366-6 is not listed on IDEAS
    2. repec:spr:jknowl:v:8:y:2017:i:4:d:10.1007_s13132-016-0367-7 is not listed on IDEAS
    3. Aniela Raluca Danciu & Vasile Alecsandru Strat, 2015. "Labor Force – Main Determinant Of the Foreign Direct Investments Located in Romania," Romanian Statistical Review, Romanian Statistical Review, vol. 63(1), pages 3-21, March.
    4. Villaverde, José & Maza, Adolfo, 2015. "The determinants of inward foreign direct investment: Evidence from the European regions," International Business Review, Elsevier, vol. 24(2), pages 209-223.
    5. Kuzmina, Olga & Volchkova, Natalya & Zueva, Tatiana, 2014. "Foreign direct investment and governance quality in Russia," Journal of Comparative Economics, Elsevier, vol. 42(4), pages 874-891.
    6. Salike, Nimesh, 2016. "Role of human capital on regional distribution of FDI in China: New evidences," China Economic Review, Elsevier, vol. 37(C), pages 66-84.
    7. repec:kap:asiapa:v:35:y:2018:i:1:d:10.1007_s10490-017-9519-y is not listed on IDEAS

    More about this item

    Keywords

    China; FDI; regional distribution; factor analysis;

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