Jiangsu Vis-à-vis Zhejiang On Attracting Foreign Direct Investment: An Institutional Foundation Analytical Framework

There is a noticeable gap between Jiangsu Province and Zhejiang Province, both of which are located in Yangtse River Delta, in attracting foreign direct investment (FDI). Jiangsu has far surpassed Zhejiang in not only the absolute amount of FDI attracted but the relative indicators (FDI Performance Index) as well. The paper assumes that supply factors of FDI are constant, which means the analysis is only based on the demand of FDI.The paper first compares the location advantages and preferential policies in foreign investment of Jiangsu with those of Zhejiang, and draws the conclusion that no remarkable difference could be found between the two provinces in regard to these aspects, thus location advantages and preferential policies fail to well explain the notable gap between the two provinces in attracting FDI.Summarizing the relevant literature, the paper then builds an institutional foundation analytical framework to explain the prominent difference between Jiangsu and Zhejiang in attracting FDI.Institutional foundation is relative to economic foundation. The institutional foundation analytical framework takes into account a region's special characteristics of its economic and political institution, its policies towards foreign and domestic investment, and analyses the different incentives and restraints the institutional foundation imposes on foreign and domestic investment respectively. Economic foundation's different incentives to domestic and foreign investment can be indicated by "Relative Foreign Competitiveness": While the institutional foundation puts more incentives on foreign investment than on domestic investment, the relative foreign competitiveness will accordingly reach a rather high level, which generates a greater demand for foreign investment, whereas while the institutional foundation puts more incentives on domestic investment than on foreign investment, the relative foreign competitiveness will accordingly decline, which leads to a reduced demand for foreign investment. The determinants of FDI model established in this paper include institutional variables. The model verifies that "relative foreign competitiveness" has a substantial positive correlation to FDI in both Jiangsu and Zhejiang.Therefore, a possible explanation to the sharp disparity between Jiangsu and Zhejiang in attracting FDI could be that although no big differences in location advantages and preferential policies are found between the two provinces, their incentives to domestic investment vary substantially, leading to a higher "relative foreign competitiveness" in Jiangsu than that in Zhejiang, which brings about a prominent gap between Jiangsu and Zhejiang in attracting FDI.