Does Broadband Infrastructure Promote Foreign Direct Investment? Evidence From a Quasi-Natural Experiment in China

Abstract

ABSTRACT: Traditionally, research on FDI has focused on macro-level factors like market size, institutional quality, financial development and policy measures. This paper, however, uniquely examines whether and to what extent broadband infrastructure influences FDI, Using the "Broadband China" strategy implemented during 2014 and 2016 as a quasi-natural experiment, this paper is one of the first to document that network infrastructure development affects FDI. Estimation results from a staggered difference-in-differences model based on a panel data of 279 prefecture-level cities in China during 2011 to 2021 reveal that pilot cities are able to attract significantly more FDI following the "Broadband China" policy. In addition, the development of digital finance and the upgrading of industrial structure can strengthen the positive relationship between broadband infrastructure and FDI. Furthermore, significant regional disparities exist in the effectiveness of broadband infrastructure on FDI, with regions that have agglomerated modern industrial sectors playing a more crucial role in attracting FDI and driving economic development. The results are robust to parallel tests, propensity score matching, placebo tests, and exclusion of samples of mega cities and provincial capitals. The study underscores the critical role of broadband infrastructure in attracting FDI, highlighting that reliable, high-speed internet connectivity is not just a technical requirement but a fundamental economic driver in today's globalized market. For policymakers, the results suggest that investments in broadband and information technology infrastructure should be prioritized as part of national and regional economic development strategies in attracting international capital. This means not only expanding broadband coverage to underserved areas but also continuously upgrading and optimizing existing infrastructure to keep pace with technological advancements. Moreover, the results highlight the importance of simultaneously developing network infrastructure, information technology, digital finance, and upgrading industrial structures to foster an environment that is highly appealing to foreign investors. By prioritizing these areas of development, policymakers can enhance their countries' or regions' competitiveness in attracting FDI and promoting economic growth.