The Empirical Studies On Determinants And Effects Of Foreign Direct Investment From China

This study examines the effect of economic determinants on foreign direct investment from China (China FDI) in manufacturing and service industries. The specific determinants are host-country market scale, exchange rate, trade relations and wage level. A related objective of the study is to understand regional variations in the effects of these determinants on China FDI. China FDI data for 2000 and 2001 covering 49 destination countries are used. The pooled regression using panel data are conducted. Results indicate that market scales of the host-country are negative and significant determinants of FDI. Moreover, exchange rate is a negative and significant determinant of FDI, while the level of exports from the home-country to the host-country is a positive and significant determinant of FDI. Finally, the wage level of host-country is a negative and significant determinant of FDI. The effect of wage level on FDI is the same for all regions, however, an increase in GDP have a positive effect on FDI from China to developing area and a negative one to developed and least developed area. A change in the exchange rate variable has a larger (negative) effect on FDI from China to the least developed area, but a positive one to the developed area. The level of exports from the home-country to the host-country has a larger (positive) effect on FDI from China to the developed area. The study concludes that these economic characteristics of host-country are important determinants of FDI from China.This thesis also seeks to examine the relationship between foreign direct investment from China and international trade that between China and host-country. Specifically, two questions are raised: first, does outward FDI from China complement or substitute international trade; that is, is FDI trade creating or trade replacing. Second, whether trade creating/replacing effects of FDI vary significant across host countries. Past theoretical and empirical studies have shown that FDI tends to replace trade, but more recent evidence suggests the opposite, that is, FDI creates and complements trade. Trade creating effects of China FDI were analyzed. A gravity-like model is used to conduct this analysis using panel data form 2000 to 2001 and covering 49 destination countries. The results indicate that while China FDI is export creating, it is import replacing, that is, outward FDI of China complement export from China to destination countries, but substitute import from host-country; and that this effect also varies significantly across destination countries.Finally, some suggestions which based on the results mentioned above are put forward for China government and enterprise that engaged in FDI. For government, it should establish and perfect the legal system to promote FDI, give special tax preferential treatment to enterprises conducted FDI, establish risk fund for FDI, strengthen the financial support for FDI, control capital flight and reduce limitations on FDI, perfect information service system relevant to FDI. For enterprise, it should grow competitive advantages to lay solid foundations for FDI, perfect the strategies of location choice, and take different strategy in view of the characteristics of different host-country.