Tax incentives and foreign direct investment in China

ABSTRACT

The preferential tax policies for foreign direct investment (FDI) in China were terminated by a tax reform in 2008. This article uses the provincial-level panel data for 1998‒2008 before the reform in order to study whether the tax incentive had been a significant determinant of foreign investment decisions. We find that market size and geographic location had significant impacts on the FDI inflow into China but the tax incentive policies were not a sufficient determinant of FDI inflow into China over the periods studied, which provides a rationale for the termination of the tax incentives in FDI at 2008 reform in China.

KEYWORDS:

• Tax incentives
• foreign direct investment
• fiscal policy
• tax reform

JEL CLASSIFICATION:

• F21
• H54
• H71

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ See Hunady and Orviska (2014), James and Van Parys (2010) and Van Parys (2012) for more details. Also Echandi, Krajcovicova, and Qiang (2015) provides a review of literature on the impact of investment policy.

Additional information

Funding

Hsu is grateful for the financial support from GRIPS Policy Research Center, Nomura Foundation and JSPS KAKENHI [17H02537].