FDI Location Decision: Evidence from Firms Investing in China

Omar Belkhodja

doi:10.5539/ijbm.v11n6p47

Abstract

By relying on an extensive set of firm data for foreign affiliates in China, the paper investigates the determinants of FDI location choice for multinational firm subsidiaries located in different special economic and investment zones. Using a logit estimation, the results suggest that various factors explain the location choice of FDI in China, and vary according to the country of origin and the sector of activity. Overall, the results show that the protection of intellectual rights, the agglomeration economies, the investments in education and the GDP of the region affect the location choice of FDI. Implications can be drawn for policy-makers to divert FDI from coastal to inland regions. Finally, the last part of the paper derives, from the obtained results, implications for future research and theory building.

Highlights

Research on foreign direct investment (FDI) has attracted much attention in recent years from scholars from multiple disciplines (Girma et al, 2005; Bitzenis, 2006; Das & Pant, 2006; Xing & Wan, 2006; Kang & Lee, 2007)
The decision to invest in newly created economic zones and cities other than Special Economic Zones (SEZs), Open Coastal Cities (OCCs) and Economic and/or Technology Development Zones (ETDZs) is measured using a binary variable (LOCATION) capturing the fact that foreign investments have been made in other types of economic zones and cities versus in SEZs, OCCs and ETDZs
Two research questions are addressed in this paper: 1- What are the determinants of FDI location choice of foreign affiliates in China? 2- What recommendations can be drawn from the results for policy-makers to boost FDI inflows in inland regions in China?

Summary

Introduction

Research on foreign direct investment (FDI) has attracted much attention in recent years from scholars from multiple disciplines (Girma et al, 2005; Bitzenis, 2006; Das & Pant, 2006; Xing & Wan, 2006; Kang & Lee, 2007). The study of the determinants of location choice has increased in popularity these recent years and a growing number of studies has been undertaken to empirically identify, test, and analyze the influential factors on the location choice by foreign investors in the Chinese context. Zhang, 1994; Schroath et al, 1993; Cheng & Stough, 2006), only few of them took into account the impact of the country of origin on foreign investors’ location choice. While Schroath et al (1993) argued that cultural and geographical factors play an important role in the spatial concentration of FDI, Qu and Green (1997) suggested that the country of origin determines the location choice and demonstrated that FDI from USA, Japan, and European countries is interested in city sizes, consumption levels and infrastructure in its location decisions (Cheng & Stough, 2006). Agglomeration economies has been identified as a significant factor in the location decisions of FDI in China as FDI usually follows the patterns of prior FDI stock (Broadman & Sun., 1997; Wei et al, 1999)

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Conclusion