The Chaotic Attractor of Foreign Direct Investment — Why China? A Panel Data Analysis

One of the key growth factors is foreign direct investment (FDI). In this chapter, we explain that China, one of Asia’s newly developing countries, is an “attractor” of FDI because its FDI inflows increased steadily in the 1990s and the early 2000s even though the world FDI inflows have decreased considerably. It is indeed “strange” or “chaotic” since its rates of FDI return are below the world average and predictions of China’s economic crisis or collapse are abundant. We find that Hong Kong and Taiwan are predominant players (40–60% of total FDI), followed by the United States and the EU, and the size of investment is generally very small. The concept of the China Circle should be expanded to the East Asia Circle, which is experienced by Taiwan and Korea in earlier decades. We also consider some important characteristics, including regional distribution, geographic proximity, and cultural similarity of these neighboring countries. To avoid spurious regressions, we use panel unit root and cointegration tests developed in the last few years. The data are taken from around 1986 to 2002, and the results from panel data regressions explain our observations quite satisfactorily.