Determinants of fdi localization in china: A county-level analysis for the pharmaceutical industry

Abstract

Foreign direct investments (FDIs) have been widely recognized as a crucial feature of the Chinese industrial development process. Over the past decades, China has been attracting huge amounts of inward FDIs as a consequence of both spontaneous market dynamics and place-based preferential policies at the sub-national level. However, the Chinese market exhibits large dissimilarities in terms of FDI localization across territories that are worth investigating at a more disaggregated level. In this regards, our study explores the determinants of attraction of inward FDIs in China, at the county level. It focuses on the pharmaceutical industry and attempts to assess whether factors related to location advantages, agglomeration dynamics, information cost effects and environmental regulation costs affect foreign firms’ localization choices as well as invested amounts in that location. By means of discrete choice models, our paper confirms the findings of the prevalent literature about the positive effects of location advantages on pharmaceutical FDI attraction. Different from our expectations, a higher proportion of foreign enterprises do not stimulate significant effects on FDI localization, while preferential policies and sectoral agglomeration are positively correlated with the localization of pharmaceutical foreign firms. Finally, our results suggest that investing firms tend to avoid areas with strict environment regulation.