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

  • 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)

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.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0616e.pdf
File Function: First version, June 2006
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0616.

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Length: 23 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:bde:wpaper:0616
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  1. Fung, K. C. & Garcia-Herrero, Alicia & Iizaka, Hitomi & Siu, Alan, 2005. "Hard or Soft? Institutional Reforms and Infrastructure Spending as Determinants of Foreign Direct Investment in China," Santa Cruz Department of Economics, Working Paper Series qt9377h519, Department of Economics, UC Santa Cruz.
  2. Álvarez, Luis J. & Burriel, Pablo & Hernando, Ignacio, 2005. "Price setting behaviour in Spain: evidence from micro PPI data," Working Paper Series 0522, European Central Bank.
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  4. Chantasasawat, Busakorn & Fung, K. C. & Iizaka, Hitomi, 2005. "The Giant Sucking Sound: Is China Diverting Foreign Direct Investments from Other Asian Economies?," Santa Cruz Department of Economics, Working Paper Series qt26414163, Department of Economics, UC Santa Cruz.
  5. Eichengreen, Barry & Tong, Hui, 2007. "Is China's FDI coming at the expense of other countries?," Journal of the Japanese and International Economies, Elsevier, vol. 21(2), pages 153-172, June.
  6. James R. Hines Jr., 1993. "Altered States: Taxes and the Location of Foreign Direct Investment in America," NBER Working Papers 4397, National Bureau of Economic Research, Inc.
  7. Arturo Galindo & Alejandro Izquierdo & José M. Montero, 2006. "Real exchange rates, dollarization and industrial employment in Latin America," Working Papers 0601, Banco de España;Working Papers Homepage.
  8. Coughlin, Cletus C & Terza, Joseph V & Arromdee, Vachira, 1991. "State Characteristics and the Location of Foreign Direct Investment within the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 675-83, November.
  9. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
  10. Álvarez, Luis J. & Dhyne, Emmanuel & Hoeberichts, Marco M. & Kwapil, Claudia & Le Bihan, Hervé & Lünnemann, Patrick & Martins, Fernando & Sabbatini, Roberto & Stahl, Harald & Vermeulen, Philip & Vilmu, 2005. "Sticky prices in the euro area: a summary of new micro evidence," Working Paper Series 0563, European Central Bank.
  11. Luis J. Álvarez & Ignacio Hernando, 2005. "The price setting behaviour of Spanish firms: evidence from survey data," Working Papers 0537, Banco de España;Working Papers Homepage.
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  13. K.C. Fung, 1991. "Characteristics of Japanese Industrial Groups and Their Potential Impact on U. S . - Japanese Trade," NBER Chapters, in: Empirical Studies of Commercial Policy, pages 137-168 National Bureau of Economic Research, Inc.
  14. Fung, K. C. & Iizaka, Hitomi & Siu, Alan, 2003. "Japanese direct investment in China," China Economic Review, Elsevier, vol. 14(3), pages 304-315.
  15. Cheng, Leonard K. & Kwan, Yum K., 2000. "What are the determinants of the location of foreign direct investment? The Chinese experience," Journal of International Economics, Elsevier, vol. 51(2), pages 379-400, August.
  16. Ryuhei Wakasugi, 2005. "The Effects Of Chinese Regional Conditions On The Location Choice Of Japanese Affiliates," The Japanese Economic Review, Japanese Economic Association, vol. 56(4), pages 390-407.
  17. Edward M. Graham & Erika Wada, 2001. "Foreign Direct Investment in China: Effects on Growth and Economic Performance," Working Paper Series WP01-3, Peterson Institute for International Economics.
  18. Liu, Xiaming & Wang, Chengang & Wei, Yingqi, 2001. "Causal links between foreign direct investment and trade in China," China Economic Review, Elsevier, vol. 12(2-3), pages 190-202.
  19. Zhang, Qing & Felmingham, Bruce, 2001. "The relationship between inward direct foreign investment and China's provincial export trade," China Economic Review, Elsevier, vol. 12(1), pages 82-99.
  20. Zhang, Kevin Honglin & Song, Shunfeng, 2001. "Promoting exports: the role of inward FDI in China," China Economic Review, Elsevier, vol. 11(4), pages 385-396.
  21. Harm Zebregs & Wanda S Tseng, 2002. "Foreign Direct Investment in China; Some Lessons for Other Countries," IMF Policy Discussion Papers 02/3, International Monetary Fund.
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