Foreign Direct Investment in China, the Factors Determining a Preference for Investing in Eastern or Western Provinces
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.
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.
KEYWORDS
Investment, Labor Cost, Agglomeration, Innovation, FDI (Foreign Direct Investment), Domestic Investment, Regional Inequality
Investment, Labor Cost, Agglomeration, Innovation, FDI (Foreign Direct Investment), Domestic Investment, Regional Inequality
Cite this paper
Granneman, A. and Dijk, M. (2015) Foreign Direct Investment in China, the Factors Determining a Preference for Investing in Eastern or Western Provinces. Modern Economy, 6, 924-936. doi: 10.4236/me.2015.68087.
Granneman, A. and Dijk, M. (2015) Foreign Direct Investment in China, the Factors Determining a Preference for Investing in Eastern or Western Provinces. Modern Economy, 6, 924-936. doi: 10.4236/me.2015.68087.
References
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[1] Dunning, J.H. (2000) The Eclectic Paradigm as an Envelope for Economic and Business Theories of MNE Activity. International Business Review, 9, 163-190. http://dx.doi.org/10.1016/S0969-5931(99)00035-9 [2] Jones, J. and Wren, C. (2006) Foreign Direct Investment and the Regional Economy. Ashgate publishing, Farnham. [3] Almahmood, A. (2010) Foreign Direct Investment in Saudi Arabia: Joint Venture Equity Shares and Source Country Characterisitcs. Thesis, Newcastle University, Newcastle. [4] Dunning, J.H. (1977) Trade, Location of Economic Activity and the MNE: A Search for an Eclectic Approach. In: Ohlin, B., Hesselborn, P.O. and Wijkman, P.M., Eds., The International Allocation of Economic Activity, MacMillan, London, 395-418. [5] Vernon, R. (1966) International Investmeent and Intenrational Trade in the Procut Cycle. Journal of Eocnomics, 80, 190-207. [6] Caves, R.E. (1971) International Corporations: The Industrial Economics of Foreign Investments. Economics, 38, 1-27. [7] Knickerbocker, F.T. (1973) Oligopolistic Reaction and the Multinational Enterprise. Harvard University Press, Cambridge. [8] Hymer, S. (1970) The Efficiency Contradictions of Multinational Corporations. The American Economic Review, 60, 441-448. [9] Buckley, P.J. and Casson, M.C. (1976) The Future of the Multinational Enterprise. Homes and Meier Press, London. [10] Dunning, J.H. (1980) Toward an Eclectic Theory of International Production: Some Empirical tests. Journal of International Business Studies, 11, 9-31. http://dx.doi.org/10.1002/tie.5060220301 [11] Sun, Q., Tong, W. and Yu, Q. (2002) Determinants of Foreign Direct Investment across China. Journal of International Money and Finance, 21, 79-113. http://dx.doi.org/10.1016/S0261-5606(01)00032-8 [12] Dunning, J.H. (2001) The Eclectic (OLI) Paradigm of International Production: Past, Present and Future. International Journal of the Economics of Business, 8, 173-190. http://dx.doi.org/10.1080/13571510110051441 [13] Dunning, J.H. (1993) Multinational Enterprises and the Global Economy. Addison Wesley, New York. [14] Dunning, J.H. (1988) The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions. Journal of International Business Studies, 19, 1-31. [15] Corrado, C. and Su, T. (1996) Skewness and Kurtosis in S & P 500 Index Returns Implied by Option Prices. Journal of Financial Research, 19, 175-192. [16] Dicken, P. (1992) Global Shift: The Internationalization of Economic Activity. Chapman Publishing, London. [17] Park, H.M. (2011) Practical Guides to Panel Data Modeling: A Step-by-Step Analysis Using Stata. Tutorial Working Paper. International University of Japan, Minami Uonuma. [18] Clark, T.S. and Linzer, D.A. (2012) Should I Use Fixed or Random Effects. Working Paper. Washington University, St Louis, No. 1315. [19] O’Brien, R.M. (2007) A Caution Regarding Rules of Thumb for Variance Inflation Factors. Quality and Quantity, 41, 673-690. http://dx.doi.org/10.1007/s11135-006-9018-6 [20] Van Dijk, M.P. (2010) The Contribution of Cities to Economic Development, an Explanation Based on Chinese and Indian Cities. Lap, Saarbrucken, 61 p. [21] CSP (2013) China Statistical Yearbook 2006. Beijing China Statistical Press, Beijing. [22] Wheeler, D. and Mody, A. (1992) International Investment Location Decisions: The Case of US Firms. Journal of International Economics, 33, 75-76.