Three Essays on FDI in China

Foreign Direct Investment (FDI) has contributed a great deal to China’s extraordinary growth by injecting capital into the economy, creating jobs, transferring technology and knowledge, enhancing trade, bringing in competition for local enterprises, improving the quality of local labor and intermediate goods suppliers, and connecting China’s gradually opening economy to the global market. For over a decade, China has been the second largest recipient of inward FDI in the world behind the United States. In 2009, China received $95 billion, which is 8.5% of the world’s total. However, the large amount of inward FDI has been unevenly distributed across Chinese provinces, with around 80% annual inward FDI flowing into the coastal region of China. Central authorities of China have been making efforts in directing FDI from the eastern coast to farther inland. This dissertation analyzes the regional determinants of FDI inflows into Chinese provinces and intends to fill certain gaps in the literature and provide new directions in this strand of research. After the introductory chapter that provides a general overview of FDI inflows in China, three self-contained essays follow. The first essay analyzes the changing agglomeration effect of FDI in China. Empirical evidence supports a weakening agglomeration effect of FDI over the years, and it suggests that at present FDI is not agglomerating. In addition, this research empirically points out the changing relative importance in market size as an FDI determinant over the years. The aims of the second essay are to examine the interdependence of Chinese provinces and to provide empirical evidence for the recent general equilibrium theory of multinational enterprises. Using two spatial models, I find that despite the competing pattern of FDI across provinces, not all surrounding provinces’ endowments display competing effects. Actually some surrounding provinces’ endowments have complementary effects. Evidence suggests that Export-Platform and Pure-Vertical forms of FDI dominate the aggregate FDI inflows into China. As some past studies have shown concerns regarding the feedback of FDI on GDP and the wage rate, the third essay constructs a simultaneous equations model to further explore this issue. Above all, the empirical results relieve our worry about the simultaneity problem, since FDI has delayed effects on both GDP and the wage rate. Adviser: Hendrik Van den Ber