Title: U.S. and Japanese Direct Investment in China: An Econometric Examination
Reference Number: 1062
Publication Date: May 2003

K.C. Fung
University of California, Santa Cruz

Hitomi Iizaka
University of California, Santa Cruz

Alan Siu
The University of Hong Kong

This paper examines the geographic determinants of U.S. and Japanese direct investment in China for the years 1990-2001. We use a random effect panel model of estimation to study their determinants. Four results emerge from our empirical study. First, the size of the domestic market matters. This is true in all our regressions. Thus U.S. and Japanese firms locate in China partly to sell in the Chinese market. Second, the share of manufacturing output accounted for by state-owned enterprises (SOEs) is negatively related to both U.S. and Japanese direct investments. This variable potentially captures all the formal and informal barriers that may exist against foreign investors. A large share of output by SOEs signal to the foreign investors that economic reforms are still far from complete and foreign investors should expect to face difficult political and economic challenges in that region. Thus as economic reforms deepen and spread to the interior and the western parts of China, U.S. and Japanese firms will increasingly migrate to those regions. In this respect, economic reforms generate double dividends: they are inherently efficient-enhancing and on top of that, they also attract U.S. and Japanese investors. Third, infrastructure is positively related to U.S. and Japanese direct investment flows. This includes railroads as well as roads. Transportation matters to the manufacturing operations of U.S. and Japanese multinationals in China. Lastly, the policy variable representing the number of Economic and Technological Development Zones (ETDZs) is also conducive to attracting Japanese and U.S. investment.

Last modified: 07/15/2003