A city-level analysis of the distribution of FDI within China
| DOI | https://doi.org/10.1108/JCEFTS-01-2016-0002 |
| Published date | 06 February 2017 |
| Pages | 2-18 |
| Date | 06 February 2017 |
| Author | Suwina Cheng,Kenny Lin,Richard Simmons |
| Subject Matter | Economics,International economics |
A city-level analysis of the
distribution of FDI within China
Suwina Cheng, Kenny Lin and Richard Simmons
Department of Accountancy, Lingnan University,
Hong Kong, China
Abstract
Purpose –The study aims to examine whether city-level investment climate, local government
effectiveness and corporate income tax rates inuence the spatial distribution of foreign direct investment
(FDI) across cities in China.
Design/methodology/approach –The study uses regression analysis using city-level data sets.
Findings –The study nds that while city-level investment climate and effective local government
inuence the spatial distribution of FDI across Chinese cities, city-level tax rates have no such inuence.
Practical implications –The results have implications for the design of policies aimed at enhancing FDI
ows into emerging countries.
Originality/value –To date, few studies have investigated the investment location choice at the city level
in a single country. The study contributes to the literature by examining the role of government in such
investment decisions. It also adds to the previously limited research examining the role of investment climate
at the micro level.
Keywords China, FDI, Government effectiveness, City level, Investment climate
Paper type Research paper
1. Introduction
Prior studies on the distribution of foreign direct investment (FDI) have been undertaken
mostly at the country or regional level (Neto and Veiga, 2013;Sethi et al., 2011). However,
within a country, city-level characteristics have a decisive effect on investment location
decisions (World Bank, 2006). Exploiting a dataset from a World Bank survey of 120 cities
across (the People’s Republic of) China, this study examines whether city-level investment
climate, government effectiveness and corporate income tax rates are associated with the
levels of FDI ows into Chinese cities from 2001 to 2010. Analyzing the cross-sectional effects
of city characteristics on FDI ows in a single country enables the study to eliminate the
possible confounding effects of culture, political stability, legal system and foreign currency
risk that are associated with cross-country studies. Further, the use of city-level data in this
study provides ner and more precise measures of investment environment and government
effectiveness than regional- or country-level measures used in prior studies. This study nds
that while investment climate and local government quality signicantly inuence FDI
location decisions, city-level tax rates have no such inuence. The results have implications
for policymakers in emerging countries seeking to attract more FDI to their shores.
The rise of FDI in emerging markets, together with its effects on growth, has become a
research focus since the turn of the century (Cheng and Kwan, 2000;Buckley et al., 2002;
JEL classication – F2, P2
The authors gratefully acknowledge nancial assistance through a Lingnan University Business
Faculty Research Grant.
Conict of Interest: The authors declare that they have no conict of interest.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1754-4408.htm
JCEFTS
10,1
2
Journalof Chinese Economic and
ForeignTrade Studies
Vol.10 No. 1, 2017
pp.2-18
©Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-01-2016-0002
Buckley and Lessard, 2005;Elango and Pattnaik, 2007;Fetscherin et al., 2010;Roy and
Mandal, 2012;Temiz and Gökmen, 2014). A positive relationship between FDI inows and
economic growth has been reported in some countries, such as China and Singapore (Chen
et al., 1995;Sun, 1998;Lee and Chang, 2009;Gui-Diby, 2014), although no such link has been
found in others, for example, Malaysia and Turkey (Roy and Mandal, 2012;Temiz and
Gökmen, 2014).
The increase in global levels of FDI and its importance to growth have led to substantial
interest in the factors that determine the global distribution of FDI. The main goal of
multinational corporations (MNCs) is normally the maximization of shareholder wealth
achieved through effective investment strategies that maximize prots. Locating the
investment well offers advantages such as cost reductions, access to resources and markets
and efciencies to MNCs. They will thus tend to seek the best location for their investment to
maximize their returns. In an era of globalization, exploiting overseas locational advantages,
i.e., those traits which make a host country most attractive for FDI, has thus become vital to
an MNC’s protability.
Prior analyses of the distribution of FDI have been undertaken mostly at the country level
(Borensztein et al., 1998;Neto and Veiga, 2013) or regional/provincial level (Cheng and Kwan,
2000;Sun et al., 2002;Sethi et al., 2011). However, cities are generally considered to be
important pivots or nodes in an economic system, and so foreign investors are also likely to
consider which cities are most suitable for international investment. While foreign investors
commonly seek markets or resources, city-level characteristics could also have a decisive
effect on investment location selection (World Bank, 2006). Blanc-Brude et al. (2014) argue
that city-level data allow a more focused examination of FDI ows and are thus more useful
for directing policy. The results of research utilizing such data can therefore assist local
government authorities and policymakers in host countries in understanding the
determinants of FDI location choice and hence in identifying areas in need of improvement
for attracting FDI inows. However, until now surprisingly few studies have investigated
the investment location choice at the city level.
This paper seeks to address this deciency in the literature by examining how foreign
investors allocate their direct investment at the city level in China. China has attracted large
amounts of FDI since its adoption of an open-door policy in 1978. In fact, it has ranked rst
amongst developing countries in terms of FDI inows for several years. A vast country,
China embraces regions, provinces and cities at different stages of economic development
across its land territory. Accordingly, investment opportunities and activities are diverse
across the country. A high degree of cross-city variation in investment climate, local
government quality and local corporate income tax rates in China provides an opportune
setting in which to investigate the association between city-level FDI and these potential
determinants.
To examine the determinants of FDI, we use data from a World Bank survey of 120 cities
across China. According to that survey, while the cities ranked highest in terms of
investment climate for foreign businesses were mainly coastal cities, cities ranked highest
for local government effectiveness included both coastal cities and inland cities. Substantial
variation in city-level investment climate and local government effectiveness in China
enables the study to develop potentially more powerful tests of the association between
citywide characteristics and FDI ows.
This study contributes to the literature by examining the role of government quality in
corporate investment decisions. Beck and Laeven (2006) suggest that government
effectiveness promotes macroeconomic growth. However, while prior studies have examined
the inuence of government effectiveness on foreign investment at the country level
3
Distribution of
FDI
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