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Chinese regional inequality and sectoral foreign direct investment

Behzad Azarhoushang, Jennifer Pédussel Wu and Shahryar Zaroki

No 119/2019, IPE Working Papers from Berlin School of Economics and Law, Institute for International Political Economy (IPE)

Abstract: Following the 1978 economic reforms, China gradually became first amongst developing countries and the second in the world, after the USA, in terms of stock of inward Foreign Direct Investment (FDI). Sustained GDP growth, a high rate of capital return and brisk economic development made China one of the best destinations for foreign capital; however, the benefits of this spectacular growth have not been evenly distributed throughout the various Chinese regions. There are many low-income and poor economic performing provinces in China although poverty is mainly concentrated in the inland regions. Since the beginning of the 2000s, a series of policies have been designed and implemented by the Chinese government to encourage foreign company investment in central and western provinces to help decrease the regional inequality with limited successes. This paper uses Panel Least Squares method to empirically analyze the impact of industrial sector FDI on Chinese regional inequality during 2003-2013. The resulting analysis shows the connection between FDI in industrial sectors and regional inequality in China. In particular, regional inequality affects FDI location choices. The findings show that economic and non-economic indicators such as human capital, infrastructure, per capita income, and government policies affect regional inequality and foreign firms' location choices. Despite government policies to support inland regional economic development, foreign firms still prefer to invest in coastal provinces further illustrating the effects of clusters in this region.

Keywords: FDI; China; Panel; regional inequality; MNCs (search for similar items in EconPapers)
JEL-codes: F68 F63 F21 F23 F16 C33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cna, nep-geo, nep-int, nep-sbm and nep-tra
Date: 2019
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