China’s Round-tripping FDI

Round-tripping FDI (known as Fake FDI) is an important phenomenon that appears in China’s transformation. The differential treatment to foreign invested enterprises (FIEs) has been widely acknowledged as the main motivation. However, after 2008 when FIEs’tax rate was unified with domestic invested enterprises, we find that round-tripping FDI did not decrease but increased instead. We are wondering how large is the scale of China’s round-tripping FDI? What are the driving factors behind round-tripping FDI? What are the impacts of these factors? Why round-tripping FDI increased after 2008? What are the policy indications? Therefore, I established an investment decision model, and empirically studied the driving factors on the basis of Hong Kong and China’s quarterly data from 1998 to 2012.Through theoretical analysis and empirical research, the main contributions of this thesis are as follows:1) The estimated scale of round-tripping FDI from 1998-2012 is between 22.39 to 41.75%, and after the turning point of year 2008, the scale unexpectedly increased.2) Changes in tax differences were confirmed by theory are positively correlated with the scale of round-tripping FDI. However, empirical studies showed that tax is not a significant factor.3) Institutional quality is positively correlated with round-tripping scale and is significant in empirical study.4) The cost of capital movement is negatively correlated with the scale of round-tripping FDI.5) When all the positive factors and negative factors change, the scale of the round-tripping FDI will depend on the influence of each factor. After 2008, the increasing round-tripping FDI is basically because that positive factors influence covered the negative one.As to policy, the thesis argues that Mainland China need to eliminate differential fiscal policy, improve domestic institutional quality and continue to steadily open up capital account.