A study on the Determinants of FDI Inflows to China

Abstract: Since the Chinese government proposed the "reform and opening-up policy" in 1979, China has achieved remarkable economic development. Foreign direct investment (FDI) has played an important role in stimulating economic development and alleviating capital shortages. This thesis explores FDI by choosing China as its destination country. Due to the boost of FDI inflows in China since the 1990s, we focus on the period 1978-2018 in this thesis; the last four decades before the COVID-19 pandemic. Location advantage theory is used as a theoretical framework to analyze the main determinants from the perspective of host countries. This thesis studies five selected factors: market size proxied by Gross Domestic Product (GDP), currency valuation proxied by exchange rate, labor cost proxied by annual wage, economic stability proxied by consumer price index (CPI), and infrastructure proxied by railway length in service in China. The autoregressive distributed lag (ARDL) method is used as the regression model, which can study the relationship from both the long -and short-run perspectives. We find that GDP, exchange rate, and railway length in service have a significant influence on FDI during the 1979-2018 period, while wages and CPI are not significant for FDI. The results indicate that market size, exchange rate, and infrastructure were strong determinants of FDI inflow in China from 1979 to 2018.