Does China receive more regional FDI than gravity would suggest?

SummaryIt is an empirical regularity that the activities of multinational corporations are concentrated in their home region. This has been shown to be the case for a majority of the 500 largest multinationals as well as for subsets of this 500 sorted by region or industry. The analysis has also been applied to the activities of a sample of all US and OECD multinationals, aggregated by country. These concentrations have been explained using theories, such as region-bound FSAs which constrain the ability of multinationals to internationalize, as well as transactions costs which make doing business outside a multinational’s home market more costly. To date, there has been no analysis that focuses on the regional and global character of multinational activity destined for China. This paper works to fill that void. Using data on FDI into China from each investor country over the period 1995–2005, this paper documents a significant regional concentration of Asian multinational activity operating within China. This regional concentration is sustained even after the special relationships with Hong Kong and (other) Offshore Financial Centres are accounted for. The evidence therefore extends the evidence of regional concentrations of MNE activities found elsewhere to China and its relationship with Asia.