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Foreign Direct Investment in China: A Spatial Econometric Study

After sealing itself for decades from the global economy, in the late I 970s China began to remove some of the barriers to the inflow of foreign direct investment. Following a period of relatively slow growth, FDI inflows to China picked up after 1990, as China surpassed every other nation but the United States in attracting foreign investment. In particular, coastal regions of China have received the bulk of EDT inflows to the country. In this paper, we use province level data to explain the pattern of EDT location across China. We build upon previous research, introducing new potential determinants, using more recent FDI data, and incorporating spatial econometric techniques. In doing so, we test for potential econometric problems arising from the spatial pattern of the data, and correct for them by running more appropriate models. We find that economic size, labor productivity and coastal location attract FDI, while higher wages and illiteracy rates deter it. The transportation infrastructure variable we try are not found to have statistically significant relationships with the level FDI inflows across provinces.

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