China’s Economic Miracle
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China’s Economic Miracle

Does FDI Matter?

Sumei Tang, Eliyathamby A. Selvanathan and Saroja Selvanathan

This insightful book analyses the impact of Foreign Direct Investment (FDI) in China as well as making valuable contributions to the theory of FDI more broadly. The authors provide empirical analysis of key factors including the location-specific determinants of FDI; the impact of FDI on domestic investment, income distribution, consumption and tourism; the relationship between FDI inflows and income inequality; causality between FDI, domestic investment and economic growth; and causality between FDI and tourism. The study concludes that FDI plays a crucial and positive role in the economic development of China. Rather than crowding out domestic investment, FDI is found to stimulate economic growth by complementing it.
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Chapter 4: Location Determinants of FDI

Sumei Tang, Eliyathamby A. Selvanathan and Saroja Selvanathan


4.1 INTRODUCTION China’s FDI inflows have increased dramatically since China opened its door to the rest of the world. This has resulted in China becoming the largest FDI host nation in the developing world since 1993. However, the rates of FDI return in China have been below the world average (Hsiao and Hsiao 2004), while the Chinese currency has appreciated in recent times. Labour costs have also increased but over the same period the share of private consumption spending in GDP has continuously declined. Despite strong economic expansion in China, there have been numerous predictions that the Chinese economy is going to collapse. Can China maintain the level of FDI inflows? What are location-specific determinants of FDI in China? Answers to these questions are important because FDI is crucial for China’s economic development. FDI helps China to overcome capital shortfalls and diffuses technology and management know-how to China’s domestic firms. Understanding China’s location-specific determinants of FDI would enable China to retain competitive advantages for FDI. This chapter explores location-specific determinants of FDI in China by applying a multivariate VAR system and the time series techniques of cointegration. In particular, we first examine the FDI development, the policies introduced in China to attract FDI and various characteristics of FDI in China over the period 1978 to 2005. Following the examination, we use the VAR model to investigate the long-run relationships between FDI and its potential determinants. There are a number of published research papers studying China’s FDI determinants. However, this chapter...

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