Promotion or Liberalization: The Effect of Targeted Investment Policies on FDI Inflows

         
Author Name INADA Mitsuo (Miyazaki Municipal University)
Creation Date/NO. September 2019 19-E-071
Research Project Studies on Foreign Direct Investment and Trade in Relation to FDI
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Abstract

This study empirically examines two Foreign Direct Investment (FDI) policies (targeted promotion and selective liberalization) and quantifies which of the two targeted measures is more effective to attract FDI inflows and to stimulate the activities of Multinational Enterprises (MNEs). We further ask whether policies for promoting FDI inflows should encourage entrants to set up new operations, or whether policies should encourage incumbents to stretch out existing operations. We implement a difference-in-differences estimation that measures the effects of FDI policies by comparing affected and non-affected industries before and after the change of FDI policies in compliance with the Chinese WTO accession. Using aggregated data on foreign equity and sales by MNEs' foreign affiliates in China over the 1999-2007, the results show that selective liberalization has a positive impact on FDI inflows especially from incumbents, while targeted promotion does not. The results suggest that selective liberalization is preferable to targeted promotion.