The Impact of Foreign Direct Investment on Industrialization in China: A Spatial Panel Analysis

Abstract

This study employs spatial econometric techniques to examine the heterogeneous effects of foreign direct investment (FDI) on industrialization across China’s four major regions—East, Central, West, and Northeast—using panel data from 31 provinces (1998–2016). Our findings reveal significant regional variations: FDI negatively impacts industrialization in the developed East, positively influences the less developed Northeast, and shows no significant effect in the Central and Western regions. To achieve balanced industrialization, policymakers should adopt spatially differentiated strategies. In the East, the focus should be on incentivizing high-value FDI in R&D and green technologies, while the Northeast could benefit from stronger economic partnerships within the Belt and Road Initiative (BRI). For the Central and Western regions, prioritizing infrastructure investments linked to the BRI and fostering cross-regional innovation corridors could attract labor-intensive FDI and promote technology diffusion, addressing regional disparities. The study’s robust spatial analysis offers valuable guidance for policymakers in crafting region-specific strategies to leverage FDI for balanced economic growth.