An Econometric Estimation of Locational Choices of Foreign Direct Investment: The Case of Hong Kong and U.S. Firms in China

UC Santa Cruz Center for International Economics Working Paper No. 02-27

23 Pages Posted: 27 Apr 2003  

K. C. Fung

University of California at Santa Cruz

Hitomi Iizaka

University of California at Santa Cruz

Chelsea Lin

National Dong Hwa University

Alan Siu

The University of Hong Kong - School of Economics and Finance

Date Written: December 2002

Abstract

This paper examines the locational choices of Hong Kong and U.S. direct investments (DI) in China using a regional data set from 1990 to 1999. The results of the panel regressions show that there are various similarities and differences in the significance and the magnitudes of the determinants of DI between these two sources. Local GDP significantly affects the inflows of both types of investments, but U.S. investment is more sensitive to local demand. The lagged wage variable negatively affects both Hong Kong and U.S. investment, but Hong Kong investment is more sensitive to local labor cost. A rise in regional labor quality raises both investment inflows, but the quality index exerts a stronger influence on U.S. investment. These econometric estimates can be understood in light of two stylized facts of U.S. and Hong Kong investments in China. First, the motive of U.S. firms investing in China is primarily to sell in China, whereas Hong Kong firms tend to invest in China to take advantage of the low labor costs and then to export. Second, U.S. investments in China tend to be more capital- and skilled-intensive than those from Hong Kong.

Suggested Citation

Fung, K. C. and Iizaka, Hitomi and Lin, Chelsea and Siu, Alan, An Econometric Estimation of Locational Choices of Foreign Direct Investment: The Case of Hong Kong and U.S. Firms in China (December 2002). UC Santa Cruz Center for International Economics Working Paper No. 02-27. Available at SSRN: https://ssrn.com/abstract=379040 or http://dx.doi.org/10.2139/ssrn.379040

K.C. Fung (Contact Author)

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
831-459-3273 (Phone)
831-459-5900 (Fax)

Hitomi Iizaka

University of California at Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States
408-476-6645 (Phone)

Chelsea Lin

National Dong Hwa University

No. 1, Sec. 2, Da Hsueh Rd.
Shoufeng, Hualien 97401
Taiwan

Alan K. F. Siu

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
+852 2859 2192 (Phone)
+852 2548 1152 (Fax)

HOME PAGE: http://www.econ.hku.hk/~asiu

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