Is China a single united market for foreign investors? - Federalism, Chinese style and inward FDI in China

Abstract

Whilst existing research on the locational determinants of inward foreign direct investment (FDI) in China and federalism, Chinese style makes important contributions to the literature in its own right, there has been a lack of formal econometric work in the literature to systematically quantify the relationship between location choice of foreign investors in China and federalism, Chinese style. This study develops a spatial dynamic model that explicitly addresses spatial externalities and path-dependent effects of inward FDI and host location attractiveness, in examining the spatial distribution of inward FDI in China under federalism, Chinese style. An empirical application of this model to a dataset of inward FDI across Chinese provinces over 1997 to 2012 shows that the location of FDI in China is determined by a combination of negative spatial externalities and positive path-dependent effects of FDI, and different host regional characteristics. This result implies that the Chinese market is highly fragmented for foreign investors.