The impact of foreign direct investment on urbanization in China

ABSTRACT

This study uses city level panel data covering China's 262 cities for the period 2004–2012 and employs the dynamic panel system generalized method of moments (GMM) model with the instrumental variables regression technique to investigate empirically the impact of foreign direct investment on urbanization in China. The study finds that foreign direct investment on average has played a significantly positive role in the development of China's urbanization. However, the impact of foreign direct investment on urbanization varies from region to region. Foreign direct investment has a positive impact on urbanization in the coastal region but has no significant impact on urbanization in the inland region. Apart from foreign direct investment, the study suggests that the economic structure, the level of economic development, the level of fixed assets investment and the size of a city's population are important determinants of urbanization in China.

KEYWORDS:

• Foreign direct investment
• urbanization
• dynamic panel system GMM
• instrumental variables
• China

JEL Codes:

• C33
• F21
• F23
• J61
• O18
• P25

Acknowledgements

The authors would like to thank the editor and an anonymous referee for their valuable comments and suggestions on the paper. The author also would like to thank the participants at the 27th Chinese Economic Society (Australia) (CESA) Annual Conference at University of Wollongong, NSW, Australia on 12–14 July 2015 for their comments on an earlier version of this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. For example, the average urbanisation rate was 64.90 per cent in 2013 for Botswana, Dominica, Ecuador, Iraq, Montenegro, Peru, Serbia and South Africa, which had per capita GDP of around $US 6000-7500, similar to the income level in China in 2013.

2. Tibet is excluded due to a lack of data.

3. China's top 15 major investors by descending order are Hong Kong (China), Japan, Singapore, the European Union (including the European Union's 28 member countries and taking France as the reference country to measure the distance), South Korea, Taiwan (China), the United States, Macau (China), Canada, Australia, New Zealand, Malaysia, the Philippines, the United Arab Emirates and Saudi Arabia. They accounted for over 80 per cent of total FDI inflows into China in 2012.

4. The coastal region includes Beijing, Tianjin, Hebei, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong and Hainan.

5. The inland region includes Shanxi, Inner Mongolia, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei, Hunan, Guangxi, Sichuan, Chongqing, Guizhou, Yunnan, Shaanxi, Gansu, Qinghai, Ningxia and Xinjiang.

Additional information

Notes on contributors

Yan Wu

Yan Wu is a PhD student at School of Economics and Resource Management, Beijing Normal University. His main research interests are development economics, rural economy, and labour migration.

Chunlai Chen

Chunlai Chen is an associate professor at Crawford School of Public Policy, The Australian National University. He is an economist specializing in international trade, foreign direct investment, agricultural economics, and Chinese economy.