Has China attracted excessive FDI inflows?

Abstract

With the large amount of FDI inflows into China since the 1990s and particularly since China's accession to the World Trade Organisation in 2001, there has been an increasing concern that China has attracted excessive FDI inflows from the world, thus crowding out FDI inflows into other developing countries. This study, using a gravity model with panel data (including 50 developing countries over the period of 1992 to 2008), finds that, after controlling its huge market size, increasing per capita income, fast economic growth, low labour costs and good creditworthiness, China's performance in attracting FDI inflows was at a level only moderately above its potential, and China received only its fair share of FDI inflows from the world for the last three decades. However, since 2005 China has been below its potential in attracting FDI inflows. Apart from the current global financial and economic crisis which severely affected the global FDI flows, the low level of FDI inflows into China from the developed countries is one of the most important causes for China's under-performance in attracting FDI inflows.