Does Trade Openness Influence the Development of Two-way Direct Investment? Evidence from Jiangsu Province, China

Abstract

Background: As a major foreign trade province in China, Jiangsu is at the forefront of introducing inward foreign direct investment (IFDI) and conducting outward foreign direct investment (OFDI), which share equivalent economic emphasis during the development of China in the recent decades. Many studies have analyzed the factors influencing IFDI or OFDI at a province or country level, while little knowledge is available related to the investigation at the prefectural city level by using a fixed effect model. Objective: The goal of this study is to examine the impact of trade openness on two-way direct investment in Jiangsu Province, China by using a fixed effect model. Methods: This study examines the impact of foreign trade openness on IFDI and OFDI by adding control variables such as industrial structure, real GDP per capita, and the number of patents granted using panel data for 13 prefecture-level cities in Jiangsu Province from 2010 to 2020. Moreover, considering the economic gap between northern, central, and southern Jiangsu, a subregion analysis was performed. The panel data for analysis are mainly derived from China City Statistical Yearbook and Jiangsu Statistical Yearbook. Results: A 1% increase in trade openness will yield a 0.637% increase in IFDI, but no significant correlation with OFDI with observed. Conclusion: Trade openness is significantly correlated with IFDI, and its relationship with OFDI requires further investigation.