Country factor differentials as determinants of FDI flow to China

Abstract Given the large size and rapid growth of foreign direct investment (FDI) in China, a systematic analysis of the connection between FDI and the characteristics of source countries provides clearer insights into the roles of home‐country factors in the vast but still fast‐growing foreign investment in China. Unlike the existing mainstream studies of FDI in China, this analysis focuses on the effects of country‐factor differentials (between investing countries and China) on the FDI flow to China. Based on data from 21 source countries over a period of 17 years, this paper examines the impacts of eight variables in three sets of country factors, namely market conditions, risk, and financial factors. The statistical results show that, while the market‐condition variables and the high values of source country currencies positively influenced the flow of FDI to China, the relatively high costs of capital borrowing and political and operational risks in China inhibited the flow of FDI. © 2003 Wiley Periodicals, Inc.