The Roles of Agglomeration Economies and Comparative Advantage in the Regional Distribution of FDI in China.

Abstract

Using data for 28 Chinese provinces from 1985 to 2007, the determinants of regional distribution of FDI among Chinese provinces have been tested under the guidance of three theories of FDI location choice: agglomeration economies, comparative advantage and location tournaments. The regression results provide support for the hypothesis in all three theories. The self-reinforcing effect of FDI in China can be confirmed and tax incentive is indeed a significant determinant for FDI location choice. Among the four proxies for comparative advantages, wage and GDP per capita have the expected effects on FDI location choice while the effect of infrastructure is statistically insignificant. Surprisingly, human capital shows a puzzling negative effect on the location choice of FDI.Differences in the behaviour of two groups of foreign investors in China: Hongkong-Macao-Taiwan (HMT) investors and NON-HMT investors can also be found. HMT investment tends to be highly responsive to tax incentive, whereas NON-HMT investors do not take tax incentive as seriously as other determinants. Agglomeration economies are found to be more important to NON-HMT investment than to HMT investment.