Determinants of Foreign Direct Investment in China: A Sectoral Analysis

This study contributes to the existing literature by examining the determinants of foreign direct investment at the sectoral level in the Chinese economy. A review of foreign investment policy in China and China’s inward FDI in presented. The empirical analysis in this study is based on the pooled data of 13 sectors for China and 9 sectors for Guangdong province over the period from 1997 to 2002. The findings indicate that market size, wage rate, degree of economic reform and innovation activities are important determinants of sectoral FDI in China. Except for the innovation factor, the other three factors are also significant for Guangdong province. Overall, the findings reveal that (i) high labour cost and state ownership might deter the inflow of sectoral FDI; (ii) the large market size encourages inward foreign investments in both China and Guangdong province; (iii) high innovation activities attract FDI in China, but have no effect in Guangdong province and (iv) the elasticity of market size and labour wage in Guangdong province is greater than that in China as a whole.