A Comprehensive Evaluation of Foreign Direct Investment ---

By Frederick Allen,2014-08-11 18:06
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A Comprehensive Evaluation of Foreign Direct Investment ---

    A Comprehensive Evaluation of and Policy Recommendation to Foreign Direct

    Investment Environments in Western China

    ;Wu Haiying

    I. Introduction

    Ever since its reform and opening-up, the pace of China’s integration into

    the economic and financial globalization has been faster and faster. Now China has become the largest recipient country of foreign direct investment (FDI) among all developing nations. During 19792002, foreign investment in China totaled

    US$623.4 billion out of which $446.3billion was FDI. Yet there lies a serious imbalance as to the actual spread of FDI amongst the country’s different regions.

    In 2002, FDI into China was $52.743bil., out of which 86.1% went to the eastern region, 9.5% to the central and the remaining 5.71% to the western region. That means that per capita FDI in the western region was only $8.30 compared with the eastern region’s $95.60. Then what are the determinants or factors that

    affected the regional distribution of foreign investment in China? What places do the various provinces in the western region hold in terms of their FDI environments? What are the disparities and causes? Through its FDI environment assessment system, this paper conducts a comprehensive evaluation and cluster analysis (CA) of the different investment environments among China’s different regions by using statistical data and quantitative models.

Literature Review

    Academic research in the past 20 or 30 years on the choice of locations of foreign investment has been focused on: 1. increased analysis of location factors in international FDI theory to explain the influence of geographical locations on the choice of FDI recipient countries; 2. site investigation on investors to find out the decision-making process of their FDI locations; and 3. quantitative methods to determine the differences of FDI destination locations or the factors deciding on the choice thereof.

    With the ever-increasing foreign investment into China, research findings on FDI to China has proliferated in both Chinese and English. Both foreign scholars and

     ; Ningxia Academy of Social Sciences, China, I am

    grateful to Professor Kitahara, Professor Hirakawa and staffs at Economic Research Center, Graduate School of Economics, Nagoya University. I would like to thank Professor Arayama especially for his helpful comments. Mr. Duan Qinglin and Mr. Yu Dahai have provided excellent research assistant work.


    Chinese scholars working or studying overseas have contributed in English to the field of research. Due to the growing geographical imbalance, choice of FDI destination locations in China has become a hot topic of academic research, a major area of which has been to examine the determinants leading to the choice of FDI locations in the country by relying on the basic principles of modern geographical location theory and by using all kinds of econometric tools, such as the analysis done by Minghong Lu(1997) on the GDP, labor cost and other data from 29 provinces during 19881995 in their influence on the FDI

    locations in the country. Houkai Wei and Feican He(2002) researched on the same by further analyzing the relationships between the choice of locations and different industry groups, the methodology of entry, differences in economic development stages in China and the different country origins of FDI.

    Kevin Honglin Zhang(2002) is representative of recent research in English in the field. He used data from 29 provinces during the 1987—1990, ’91—’94 and ’95—’98

    periods and analyzed the influence of such factors as market scale, labor cost, labor quality, business concentration, transportation cost, stimulation policy and cultural link on the choice of FDI destinations. Then he compares the results from his regression analyses of the three above-mentioned periods with those of the panel estimate from the 12-year period between 19871998. Changhui Zhou, Andrew Delios and Jingyu Yang(2002) used

    data from 28 provinces during 19801998 for the analysis of Japanese businesses in their

    decision of investment locations. One feature standing out in their research is the use of the number of businesses and the number of employees as a variable. In their study the accumulative number of businesses was used to explain the degree of economic concentration in the variable whereas the same was explained by the development stage of industry in other studies.

    Though different variables and data years were used in the above researches, the quantitative methodology remained the same. The main purpose of their research was to try to find out what factors, and to how large a degree, influenced the inflow of FDI into China or from which country, i.e., the relationship between FDI and certain determining variables(determinants). Based on the assessment of the FDI environments in western China, this paper intends to: 1. set up an assessment system of indicators by using the above-mentioned FDI and its relevant factor analysis methodology to determine the certain factors most relevant to FDI in China; 2. to ascertain the combined index of FDI in 30 provinces in China in order to discover where western provinces lie in the index; and 3. to carry out a cluster analysis in the hope of finding out the commonality of the FDI environments in the 12 western provinces and their disparities with that of their eastern counterparts by objectively analyzing the internal types of the FDI environments in China’s 30 provinces and regions.


?;An Empirical Assessment of FDI Determinants

    2.1 Model specification and variables

    Based on calculations, the following model is constructed:

    FDI0+αX+ε i ii

    where =1,…,30; FDI is the amount of FDI inflow into the provinces in a given ii

    period of time; X denotes a set of independent variables that vary across i

    provinces and over time; and ε denotes stochastic disturbance. The variables used in this analysis are defined below(See Table 1).

    FDI: A dependent variable referring to the share of FDI inflow into various regions, its unit being 100 million yuan(RMB) at the average annual exchange rate with US dollars listed by the Ministry of Commerce of China.

    Following are independent variables:

    GDP: Gross Domestic Product, the total amount of production and services of a certain region in a given year, and a substitutive variable of the market volume in this study, its unit being billions of RMB. Theoretically, its expected impact should be positive.

    LOCA: A dummy variable with the eastern region=3, the central=2, and the western=1. Geographically, Guangxi Province belongs to the eastern coastal region and Inner Mongolia the central, but for the Great Development of Western China, both Guangxi and Inner Mongolia are considered western province and region. It should have a positive impact on FDI inflows,

    STA: The state-owned industrial output, or ratio of the state-owned and state-held majority industrial enterprises output to the gross industrial output.

    Reflecting the degree of maturity of China’s market economy, it should be

    negatively related to FDI inflows. Its unit is the percentage (%). TER: Ratio of the value-added of the tertiary in GDP, mainly indicating the stage of development of finance, transportation, information services, etc. It’s expected

    impact should be positive. Its unit is in percentage.

    CITY: Urbanization level, representing the ratio of cities with an urban population of 500,000 out of the total number of cities in a given region. Theoretically, this variable should be positive on FDI, its unit being in percentage. POLI: A dummy variable. With reference to Sylvie Démurger’s(2002) approach,

    this paper measures and tests favorable policy index based on the types of the special economic zones established by each province(the weight varies from three to one and that of non-open regions is null) and the open-door policy(Western Development region=0.5). Representing preferential policies, and it should be


positively related to FDI inflows.

    WAGE: A dummy variable. It is 1 if the labor cost of the region is higher than that of the national average, or it will be null. In theory, it is inverse to FDI. LI: This variable refers to the proportion of light industry above a certain size relative to the gross industrial output value. With the priority change from heavy industry to the compensatory development of light industry since China’s reform

    and opening-up, FDI has been affected by the regional distribution of light industry locations in China. Its unit is in percentage.

    FTD: Foreign trade dependency degree is equal to the ratio of total imports and exports in GDP. Reflecting the openness of the economic development of the region concerned, it’s impact should be positive theoretically. Its unit is in


    FI: The proportion of the amount of foreign enterprises’ imports out of the total

    local imports and exports, which reveals the degree to which local governments control the imports by foreign enterprises. It should be positively related to FDI inflows, its unit being the percentage.

    HC: Illiteracy rate of the population at or over the age of 15 in the region concerned, which represents the accumulation of the local human resource. It should be theoretically negative related on FDI inflows, its unit being the percentage.

    We conduct a multi-regression analysis with the comprehensive data of 30 provinces (excluding Tibet) from the various years between 1998--2002 and the cross-sectional data of the year of 2002 respectively.

    Time frame for the selection of the data is based on two considerations: one is that Chongqing, which has attracted quite an enormous amount of FDI in recent years, began to have its own statistics in 1998, and the other is that the on-going Great Western Development started in 1999, so statistics from 19982002 can better reflect the changes that took place after the Development began.

    Model based on the comprehensive data from 19982002 is as follows:

Model I: ln(FDI)=a+aln(GDP)+aSTA+aTER+aLOCA+aWAGE+ε 12345

Model II: ln(FDI)=a+a ln(GDP)+aLI+aFTD+aFI+aHC+ε 12345

And the model based on the cross-sectional data from 2002 is:

Model III: ln(FDI)=a+a ln(GDP)+aLOCA+aPOLI+aCITY +ε 1234


2.2 The estimation results

    Factors affecting FDI inflows are estimated by the ordinary

    least-squares(OLS) techniques of the SAS statistic analytic software package. Through repeated measurements and calculations, 11 factors remarkably affecting FDI are established. They are lnGDP, TER, CITY, FTD, LI, POLI, LOCA, FI, STA, WAGE and HC. The results are illustrated in Table 2.

    The overall performance of three estimates is satisfactory. Values of

    2 adjusted Rin the three cases were from 71 percent to 85 percent, indicating a strong explanatory power of the models, and the significance level of F test is p<0.0001, indicating that the significance of the model regression as a whole is high.

    The determinant model of FDI in 2002 is purposefully designed as Model III in order to test the impacts of various factors in pure cross-sectional data, the results of which denote that factors In (GDP), LOCA, CITY and POLI affect FDI significantly but both factors of POLI and LOCA are significant at 5 percent.

    Specifically, some coefficient estimates in the models appear to be low. But in effect, when the statistic position of independent variable to dependent variable is horizontal-logarithmic value, the interpretation of coefficient a should

    be: %?y=(100a)?x, i.e. the coefficient should be multiplied by 100. For a better understanding, factors in question are discussed as follows.

    1) GDP

    GDP refers to the economy and market size of a region. In Model I, the impacts of GDP on FDI is significant and the elastic coefficient is 1.147, denoting that when GDP between provinces increases at 1%, FDI will correspondingly increase by 1.147%. In addition, we also tested the relationship between FDI and per capita GDP, but it failed to pass the t test. As other researchers concluded, FDI is mainly to capture the markets of all provinces, municipalities and autonomous regions where the average individual consumption level remains low but its total amount is enormous. However, the elasticity estimated by cross-sectional data is far lower than that by comprehensive data. Provinces with less GDP values in the western region do see their FDI inflows affected, but it is relatively more favorable to those regions with larger GDP’s such as Sichuan, Shaanxi (Xi’an), Chongqing, etc.

    2) LOCA

    Three belts of the eastern, central and western regions can fully illustrate the natural and economic environment variability of China. Regional factors mainly affecting foreign investment policy-making are transportation costs. Particularly, eastern coastal regions are endowed with naturally convenient conditions for


    export. Other economic advantages are the closeness between these regions and the nearby investor countries, the consanguinity with their overseas Chinese investors, and the geographical factors that offer them superior agriculture, resources, human capital and so on and so forth. The disturbance coefficient of LOCA on FDI is 0.733, i.e., the regional variation of the eastern, central and western regions affects FDI inflow to a certain extent and the regional disadvantage of western China is unfavorable to attracting FDI inflow. 3) POLI

    Establishing regional variations by offering preferential economic policies is crucial in order to attract foreign investment into China. It is well known that the reform and opening-up of China began with the preferential policies granted to Guangdong and Fujian provinces for their economic and foreign trade activities. In 1980, four special economic zones(SEZ), typical of which was the Shenzhen SEZ, were set up as a pilot scheme; in 1984, 14 more eastern coastal cities were