Title: International Competition for Foreign Direct Investment: The Case of China
Reference Number: 1134
Publication Date: December 2003
JEL Classifcation:

Busakorn Chantasasawat
University of California, Santa Cruz

K.C. Fung
University of California, Santa Cruz and HK Institute of Economics and Business Strategy

Hitomi Iizaka and Alan Siu
The University of Hong Kong


There is a large literature on the determinants of foreign direct investment. In recent years, China emerges as the largest recipient of foreign direct investment. Is China taking direct investment away from other Asian economies? Theoretically, a growing China can add to other countries' direct investment by creating more opportunities for production networking and by raising demand for raw materials and resources. At the same time, relatively low Chinese labor costs may lure multinationals away from other Asian sites when multinationals consider alternative locations for low-cost export platforms. In this paper, we explore this important issue empirically. We use data from eight Asian economies (Hong Kong, Taiwan, Republic of Korea, Singapore, Malaysia, Philippines, Indonesia, and Thailand) from 1985 to 2001 and control for the determinants of their inward foreign direct investment (FDI). We then add China's FDI inflows as an indicator of the "China Effect". Due to possible simultaneity between China's and the Asian countries' inward FDI, we use fixed effects as well as random effects simultaneous equation models to estimate the "China Effect". We have four results: (1) The level of China's FDI is positively related to the levels of other Asian economies' inward direct investments; (2) the level of China's FDI is negatively related to these economies' shares of total Asian inward FDI as well as shares of total FDI inflows to the developing countries; (3) the China Effect on the Asian countries' shares of the world inward FDI is mixed, minimal and not significant; and (4) the "China Effect" is not the most important determinant of inward direct investments to these economies. In particular, corporate tax rates, the level of corruption, and openness to trade have more influential effects on FDI inflows.


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Last modified: 06/22/2005