Exploring the Influencing Factors of FDI in China’s Internal Regions: Evidence From Taiwan

Abstract

This study aims to explore the influencing factors of the location determinants of Taiwan’s foreign direct investments (FDIs) in China’s internal regions. This study proposes three models to examine the influencing factors of Taiwan’s FDIs in China by combining the location advantages of the host country, the economy and politics of the home country, and network relationship in bilateral and regional trade agreements: First, analyze the location distribution of Taiwan’s FDIs in China’s six regions; Second, analyze the location determinants of Taiwan’s main sectors’ (manufacturing and service) FDIs in China; Third, analyze the location determinants of Taiwan’s high-tech industries’ FDIs in China’s six regions. The estimated results show that bilateral trade agreement seems to have positive effects on Taiwan’s FDIs in China, while regional trade agreement seems to have negative effects. In Taiwan’s political form, the ruling party with characteristics of political defense against China seems to have negative effects on most of Taiwan’s industries (except manufacturing) and the overall FDIs in China. In terms of China’s relevant economic factors, the main determinants of Taiwan’s high-tech industries’ FDIs in the major regions of Eastern and South Central of China are infrastructure and high-level human capital resources. China’s GDP growth and increase in unit labor cost have negative effects on FDIs in most regions of China. This implies that the advantage of low wages in China Factory may gradually decline. This study provides some references and implications for future research and policy makers for the analysis of relevant influencing factors of FDI. and distribution of FDIs by combining the influencing factors of the economy, politics (political party alternations in the presidential election) and industries’ characteristics of the home country, network relationships (ECFA, RCEP), and the host country related economic factors. This study proposes three models to explore the influencing factor of Taiwan’s FDIs in China’s internal regions: First, analyze the location distribution (China’s six regions) of the longer term (1991-2017), total amount of FDIs in China. Second, analyze the location determinants of Taiwan’s main sectors’ FDIs in China. Third, analyze the location determinants of Taiwan’s high-tech industries’ FDIs in China’s six regions. Estimation results indicate that bilateral trade agreement (ECFA) seems to have positive effects on Taiwan’s FDIs in China, while regional trade agreement (RCEP) seems to have negative effects. In Taiwan’s political form, the ruling parties (PA 1 and PA 3 ) with defensive political characteristics against China seem to have negative effects on most of Taiwan’s industries (except manufacturing) and the overall FDIs in China. In terms of China’s relevant economic factors, the main determinants of Taiwan’s high-tech industries’ FDIs in China’s major regions of Eastern and South Central are infrastructure and high-level human capital resources. China’s GDP growth and the increase in unit labor cost have negative effects on FDIs in most of China’s regions. This implies that the advantage of low wages in China Factory may gradually decline. Previous FDI studies less attention to the analysis of the political dynamics of the home country. This