The impact of WTO accession on China's inward foreign direct investment

This paper analyzes the future development of Foreign Direct Investment (FDI) after the WTO accession in China. There are two different theories concerning the impact of China's WTO accession in FDI. The theory based on the "tariff-jumping" hypothesis argues that FDI arises due to the existence of high tariff rates, since an FDE firm can produce locally and sell locally, avoiding tariff. After China joints WTO, according to this theory, tariff rates will be reduced substantially and therefore, FDI in China will decrease significantly. However, another theory predicts that FDI in China would actually increase after the WOT accession, since the WTO membership would stimulate the "export-oriented" and "market-oriented" investment because of an improvement in China's overall investment environment. To examine the impact of the WTO accession on changes in China's inward FDI, we conduct a empirical study of the determinants of China's inward FDI. A panel data set consisting of inward FDI in China form 22 economies form 1984 to 1997 is utilized and an econometric model is developed. The findings reveal that the "tariff-jumping' theory is not relevant in China. Therefore, the tariff reduction following the WTO accession would not reduce FDI in China. The findings also indicate that bilateral trade, relative changes in market size, relative exchange rate and OECD status are important determinants of inward FDI in China. Overall, the research finds that FDI inflow to China would increase rather than decrease after her WTO membership.