TITLE:
Foreign Direct Investment in China, the Factors Determining a Preference for Investing in Eastern or Western Provinces
AUTHORS:
Alex Granneman, Meine Pieter van Dijk
KEYWORDS:
Investment, Labor Cost, Agglomeration, Innovation, FDI (Foreign Direct Investment), Domestic Investment, Regional Inequality
JOURNAL NAME:
Modern Economy,
Vol.6 No.8,
August
27,
2015
ABSTRACT: Why do foreign
enterprises invest in certain provinces of China? This study started with five
possible factors that could influence the decision of multinational corporations:
1) Economic growth; 2) Labor costs; 3) Domestic investments; 4) Agglomeration
advantages; and 5) Innovation. The Eastern and Western provinces are slowly
converging in terms of foreign direct investments (FDI) and growth rates. Especially
after the 11th and 12th five year plans, which were primarily aimed at opening
up the Western part of China. Based on a data for the time period 1992-2012 for
each of the 30 provinces we analyzed the hypotheses derived from Dunning [1].
After checking for normality and multi-collinearity we estimated the
coefficients of the independent variables and their statistical significance.
To find different determinants across China, this study opted to do the
analysis for the Eastern and Western provinces of China separately. GDP Growth
is found to be positively related to FDI in both cases. The wage level is only
found to be significant in the Eastern provinces. A reason for this can be that
the Eastern China is a step ahead of the Western China, higher educated people
are needed and hence higher labor costs are accepted. Domestic investments are
found to have a positive effect on FDI in both models. Finally the indicator
for agglomeration has a positive significant coefficient: already existing
businesses pull MNEs. This effect is found to be stronger in the Eastern provinces;
this can be due to the fact that more MNEs have already established their
businesses over there. Lastly, the variable patent has the wrong coefficient in
both models. These results have policy implications and confirm the importance
of certain location factors as suggested in the Dunning model. The government can stimulate FDI in the
western provinces by promoting domestic investments in these provinces. Also
agglomeration attracts FDI and can be promoted.