Mapping the Dynamics of FDI in China: Convergence, Divergence, and Policy Insights Within Free Trade Zones and Beyond

Abstract

The uneven distribution of FDI contributes to inequality in economic development. Most studies on FDI in China use provincial data and parametric tools of analysis while delivering mixed findings regarding FDI’s distribution and free trade zones (FTZs) attractiveness. We investigate the convergence and transitional dynamics of relative FDI (RFDI) in China using visual tools of the distribution dynamics approach to a panel of 273 prefectural cities from 2003 to 2019. Convergence-divergence patterns are examined from inter- and intra-regional perspectives and FTZs vis-à-vis non-FTZ cities. In the long run, most entities within each region converge towards different RFDI values (from 0.05 to 0.25), far below the national average equal to one. FDI is the most unevenly distributed within the poorest western region. Furthermore, three (two) convergence clubs emerge among the non-FTZ (FTZ) entities around RFDI values of 0.05, 0.6 and 2.7 (2.5 and 10). The results corroborate the New Growth and New Economic Geography theories, indicating an absence of desirable spatial diffusion from affluent ‘core’ cities and FTZs to ‘peripheral’ entities outside the FTZs. Additionally, we provide a ‘policy priority list’ comprising western cities with above (below) average RFDI and the highest propensity to diverge further above (below) the national mean.

Keywords: China, Transitional dynamics, convergence, foreign direct investment, free trade zones

JEL Classification: F21, F2, F