Working Paper: NBER ID: w11335
Authors: Barry Eichengreen; Hui Tong
Abstract: We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI. We do so using an approach that accounts for the endogeneity of China's FDI. The impact turns out to vary by region. China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. For whatever reason -- limits on their ability to raise finance for investment in multiple markets or limits on their ability to control operations in diverse locations -- firms more inclined to invest in China for this reason are corresponding less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions.
Keywords: Foreign Direct Investment; China; Economic Growth; FDI Diversion
JEL Codes: F0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Chinese FDI (F23) | FDI inflows to OECD countries (F21) |
| Chinese FDI (F23) | FDI inflows to other Asian countries (F21) |
| Chinese FDI (F23) | FDI inflows to some countries as production hubs (F21) |
| Chinese FDI (F23) | crowding out effect in certain contexts (E62) |
| Chinese FDI (F23) | attractiveness as production hubs for integrated supply chains (R32) |