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Hard or Soft? Institutional Reforms and Infrastructure Spending as Determinants of Foreign Direct Investment in China

Author

Listed:
  • K. C. Fung

    (University of California at Santa Cruz)

  • Alicia García-Herrero

    (Banco de España)

  • Hitomi Iizaka

    (University of California at Santa Cruz)

  • Alan Siu

    (University of Hong Kong - School of Economics and Finance)

Abstract

In this paper, we examine empirically whether hard infrastructure, in the form of more highways and railroads, or soft infrastructure, in the form of more market oriented institutions through deeper reform, lead to more foreign direct investment (FDI) in China. We use data of outward FDI from the United States, Japan, Hong Kong, Taiwan and Korea to various regions of China from 1990 to 2002. We control for the standard determinants of FDI, namely regional market size, wage rates, human capital and tax policies. We add indices of hard and soft infrastructure and find that soft infrastructure, in the form of more market oriented institutions through deeper structural reform, consistently outperforms hard infrastructure as a determinant of FDI.

Suggested Citation

  • K. C. Fung & Alicia García-Herrero & Hitomi Iizaka & Alan Siu, 2006. "Hard or Soft? Institutional Reforms and Infrastructure Spending as Determinants of Foreign Direct Investment in China," Working Papers 0616, Banco de España.
    • Handle: RePEc:bde:wpaper:0616
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    References listed on IDEAS

    as
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    Keywords

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    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

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