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Is China's FDI Coming at the Expense of Other Countries?

  • Barry Eichengreen
  • Hui Tong

We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI. We do so using an approach that accounts for the endogeneity of China's FDI. The impact turns out to vary by region. China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. For whatever reason -- limits on their ability to raise finance for investment in multiple markets or limits on their ability to control operations in diverse locations -- firms more inclined to invest in China for this reason are corresponding less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions.

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File URL: http://www.nber.org/papers/w11335.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11335.

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Date of creation: May 2005
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:11335
Note: ITI
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  1. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," William Davidson Institute Working Papers Series 63, William Davidson Institute at the University of Michigan.
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  14. Benoît Mercereau, 2005. "FDI Flows to Asia; Did the Dragon Crowd Out the Tigers?," IMF Working Papers 05/189, International Monetary Fund.
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