Competing for Foreign Direct Investment

This article explores the effects of locally adopted economic development zones and government spending promoting foreign affairs on foreign direct investment (FDI)–related employment in Chinese provinces. While these policies are motivated by a desire for employment growth, empirical evidence supporting their effectiveness has proven elusive. Using data from Chinese provinces covering 1999 to 2012, we explore this relationship using a dynamic system generalized method of moments approach. We find some evidence that trade zones enhance FDI-related employment but find none to support the idea that industrial development zones and spending to promote foreign affairs increase employment. Conversely, regional spillovers are consistently found to increase FDI-related employment in our main results and all robustness checks. We argue this highlights the importance of crowd-out effects and agglomeration spillovers, and that coordinating FDI promotion policy across regions may compare favorably to the current approach, which mainly encourages local competition over a largely fixed pool of aggregate FDI.