The Determinants and Structural Change of FDI in China – A Study Based on City-Level Panel Data

As one of the important developing countries, China has experienced a tremendous amount of economic growth in the past 30 years. This in turn has attracted a huge amount of foreign direct investment (FDI) into the country. However, according to past literature, FDI location is imbalanced in China. Building upon this finding, this paper attempts to identify factors affecting the location determinants of FDI in China. By introducing “spatial variable” into the analysis, this paper measures the agglomeration effect of a city level data. The results show that the spatial variable (market potential factor), plays a significant role in FDI flows. Also I find that previous FDI flow, market potential factor, infrastructure construction, government preferential policies and coastal location can attract FDI flow. While higher wages and education level effects are not clear. By separating the data into two sub-sample periods (1996-2002 and 2003-2008), I find that in response to the transformation of the economic situation, foreign investors shift their investment direction into regions with high education and high income level. This observation is different from previous studies. This study provides deeper perspective on the factors that attract FDI flows to China, and how the transformation of the economic environment change the direction of FDI flows