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Foreign Direct Investment and the Chinese Economy

A Critical Assessment

Chunlai Chen

Foreign Direct Investment and the Chinese Economy provides a comprehensive overview of the impact of foreign direct investment, with extensive empirical evidence, on the Chinese economy over the last three and a half decades.
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Chapter 6: The impacts of foreign direct investment on urbanization development in China

A Critical Assessment

Chunlai Chen

Extract

Foreign direct investment in China has created a large amount of employment opportunities for rural surplus labor and the heavy concentration of FDI in China’s coastal region has attracted hundreds of millions of rural migrants from the inland region to work in the coastal region. This type of rural–urban and cross-region population migration associated with FDI may have impacts on China’s urbanization development, especially on the urbanization development in the inland region. Chapter 6 uses a city-level panel dataset covering China’s 262 cities for the period 2004–13 and employs the dynamic panel system Generalized Method of Moments (GMM) model with the instrumental variables regression techniques to investigate empirically both the impacts of FDI on urbanization development in China and the interregional impacts of FDI, especially FDI in the coastal region, on the urbanization development of the inland region. The study finds that FDI has played a significantly positive role in the urbanization development of a host city. However, the study also finds that FDI in other inland cities and FDI in coastal cities have different interregional impacts on the urbanization development of an inland city. FDI in other inland cities could contribute to increasing the urbanization development of an inland city as FDI in other inland cities can create positive interregional knowledge spillovers due to its low level of engagement in processing trade and extensive industrial linkages with firms in inland cities. However, FDI in coastal cities impedes the urbanization development of an inland city because FDI in coastal cities has negative interregional spillover effects resulting from its high level of engagement in processing trade and lack of industrial linkages with firms in inland cities.

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