Changes in Determinants of China's Inward FDI after its Entry into the WTO: the Knowledge-Capital Model Approach

Abstract

This paper aims to empirically estimate the determinants of China s ’ inward FDI and compare the transition before and after China's WTO accession, dividing FDIs into horizontal and vertical purposes. The paper examines bilateral FDI from the OECD database to analyze the determinants and purposes of 20 OECD countries' investment into China from 1993 to 2012 by using an underlying source of the Knowledge-Capital Model. The empirical result shows that China's inward FDI has been affected positively by economic scale and market similarity and negatively by geographical distance over the whole sample period. Before China's WTO accession, the difference in the level of wage affected China's inward FDI positively, implying that the vertical purpose was the main reason. After China's WTO accession, however, the result shows that the main reason for OECD counties investment into China turned to horizontal purpose with ’ positive coefficient estimates for economic scale and market similarity and a negative coefficient estimate for the difference in the level of wage.