The Determinants of Foreign Direct Investment in China: A Spatial Panel Analysis

Abstract

China is currently the major foreign direct investment (FDI) destination arising from her open door policies since 1978. FDI has become a large impetus to China’s economic growth. However, the geographical distribution of FDI in China is severely biased with 83% concentrated in the eastern region. This is a result of not only differences in locational advantages but also the result of the initiating policies and temporal differences of FDI inflows among the regions. This study aims to examine the determinants of FDI and examine empirically the possible coherent policies for the three regions of China (Eastern, Central and Western) using the spatial panel analysis for the data within the period of 1994 to 2008. The empirical results show that the determinants of FDI vary among the three regions, depending on the motives of the investor and the results of policy bias. The entrepreneurial nature of competition of FDI among the provinces revealed by the spatial FDI factor is a conclusion that cannot be ignored. A more coherent policy on FDI inflows into China is an urgent necessity, though the policies for each region must be, of necessity, different for each of the three regions.   Keywords: Foreign Direct Investment, China, Spatial panel model, spatial variables JEL: F14, C33