This paper attempts to determine empirically whether China is taking foreign direct investment (FDI) away from other Asian economies (the “China effect”). A random-effects simultaneous equation model, controlling for the determinants of inward FDI of eight East and Southeast Asian economies over 1985–2001 and using China's inward FDI as an indicator of the China effect, indicates that China's FDI level is positively related to these economies' FDI levels and negatively related to their shares in FDI in Asia. Moreover, openness, corporate tax rates, and corruption can exert a greater influence on these countries' FDI than China's FDI.
This is a revised version of a paper presented at the sixth Asian Economic Panel meeting on 9–10 October 2003 in Seoul, South Korea. We appreciate the comments from Wing Thye Woo, Marcus Noland, Gordon de Brouwer, Yunjong Wang, Chan Kang, Chou Ji, Yiping Huang, Xiao Geng, Sylvie Démurger, Fredrik Sjöholm, Angang Hu, and other participants at the conference. This research is supported by the Asian Economic Panel and by a grant from the University Grants Committee of the Hong Kong Special Administrative Region, China (Project No. AoE/H-05/99).