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Externalities and Unbalanced Regional Distribution of FDI: The Case of China

This article investigates the spatial determinants of foreign direct investment (FDI) at the provincial level in China. Pecuniary externalities and technological externalities are the two main reasons behind the concentration of FDI in China. This article examines the resulting imbalance in the regional distribution of FDI among China's 30 provinces, municipalities and autonomous regions. It takes a novel approach to further investigate the role of innovation efficiency. This is also an indicator of technological externality. Panel data sets from 1999 to 2007 reveal that in attracting FDI, the domestic regional markets and foreign markets have substitution effects with one another based on the samples representing the national, eastern and central provinces. This effect, however, is not found in the samples from the western provinces.