Stock Markets, FDI and Challenges of Sustainability
Advances in Chinese Economic Studies series
Edited by Lilai Xu
Chapter 5: Determinants of Investment Intensity of Source Economies in China
Chunlai Chen INTRODUCTION One of the most prominent features of foreign direct investment (FDI) in China is the overwhelming dominance of developing economies. Comparing the two groups of developing and industrialized source economies at year-end 2008, investments from developing source economies accounted for 75.38 per cent of China’s total inward FDI stock, while investments from industrialized source economies accounted for only 24.62 per cent of the total.1 Why has China been so successful in attracting FDI inflows from developing economies, especially from the Asian Newly Industrializing Economies (NIEs), but has not been as successful in attracting FDI inflows from industrialized economies, especially from the Western European economies, even though they are the major investors for world FDI? In other words, what factors explain the investment relations between economies? Braga and Bannister (1994) find that economic proximity, which includes geographic distance, cultural difference and regulatory barriers, affects the investment relations between countries. The investment levels are higher between countries which have higher economic proximity. For example, FDI flows among Association of South East Asian Nations (ASEAN) economies have increased dramatically since the 1990s. Markusen (1995) observes that the bulk of world FDI flows is among economies with similar per capita incomes and similar relative factor endowments. This observation is supported by the high levels of FDI flows among developed countries. Caves (1996) points out that languages and cultures shared between economies reduce multinational enterprises’ (MNEs) transaction costs and that the bulk of foreign investments go where the transactional and information-cost disadvantages...
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