Exploring the significance of domestic investment for foreign direct investment in China: A city-network approach

Abstract: https://journals.sagepub.com/doi/full/10.1177/0042098018795977#abstract

A Novel Addition to the Urban Studies Literature

By 2012, China’s Foreign Direct Investment (FDI) had overtaken that of the USA, making China the world’s biggest FDI host economy. Undoubtedly, FDI has contributed significantly to China’s rapid economic growth and this has been reflected in a number of studies analysing recent FDI projects and their relationship with Domestic Investment (DI). However, most studies have considered the effect of FDI on DI volume while little attention has been paid to the potential role of DI in attracting FDI inflows to Chinese cities, leaving a research gap that we fill in this article by adopting a network approach to DI-FDI analysis.

Due to telecommunications and transportation developments, the sociologist Manuel Castells suggested that in the modern-day network society the ‘space of flows’ is making distance less important (Castells, 1996). Furthermore, some authors have argued that network resources have become strategic resources that allow economic actors to benefit in complementary ways from valuable external knowledge (Dyer and Hatch, 2006; Huggins, 2010). The networked nature of twenty first century economic activity therefore presents an important new angle for the investigation of patterns of cross-border capital flows, such as DI and FDI. Ignoring the network characteristics of investment flows in analysis may well lead to inaccurate representation of present-day economic realities and to biased results and faulty conclusions. The analysis presented in this article is thereby an important addition to the urban studies and economic geography literature since it addresses the question: ‘What is the association between DI network flows and the attractiveness of Chinese cities for FDI?’

The Data and the Model

DI data are sourced from Bureau van Dijk (Orbis) on corporate sharehold changes in which parent firms in China invest in shares in other Chinese firms. FDI data are sourced from the Financial Times fDi Markets database on so-called ‘greenfield’ investments in which parent companies start up entirely new ventures in foreign countries by developing new operational facilities from the ground up. In total, 9315 DI projects and 2743 FDI projects are used to investigate the association between China’s DI network and the attractiveness of its cities for FDI flows. Cross-matching of the cities in the two databases allows DI-FDI relations for 77 Chinese cities to be studied using network analysis. Network analysis measures such as weighted ‘Indegree’ and ‘Outdegree’, reveal the DI and FDI flows into and out of different cities. Meanwhile, ‘Betweenness’ and ‘Closeness’ measures reveal the network ‘distances’ and ‘connectedness’ between different cities arising from DI and FDI flows.

Main Findings

First, the results on the general geographical pattern of DI and FDI show that this reflects a longstanding ‘core-periphery’ pattern of economic development between China’s more developed coastal and less developed inland areas.

Second, the DI network is shown to be centralized, indicating that most network resources are concentrated in China’s leading cities, Beijing, Shanghai, Shenzhen and Guangzhou, which have strategic economic positions.

Third, it is found that the DI network has an important role in attracting FDI to China’s cities. Network ‘bridging’ and ‘clustering’ positions (Betweenness and Closeness respectively) and a diversified profile of DI network ‘linkages’ (Indegree and Outdegree), can be expected to increase the attractiveness of cities to foreign investors.

What Main Conclusions Can Be Drawn?

The findings suggest that the relationship between DI and FDI cross-border flows is reshaping China’s economic geography and should be exploited in strategic planning and policies aiming to stimulate future growth and avoid transactions associated with economic decline (Pain, 2012). The association between city cross-border investment networks and growth identified in the article demonstrates the importance of network analysis as a new method for mapping the fast-changing Chinese economic landscape.

References

Castells, M. (1996) The Rise of the Network Society: The Information Age: Economy, Society and Culture, Volume I. Blackwell, Oxford.

Dyer, J. H., and Hatch, N. W. (2006) Relation‐specific capabilities and barriers to knowledge transfers: creating advantage through network relationships, Strategic Management Journal 27(8), 701-719.

Huggins, R. (2010). Forms of Network Resource: Knowledge Access and the Role of Inter‐Firm Networks. International Journal of Management Reviews 12(3), 335-352.

Pain, K. (2012) Spatial transformations of cities: Global city region, mega-city region? In Derudder, B., Hoyler, M., Taylor, P. J. and Witlox, F. (eds.) International Handbook of Globalization and World Cities, pp. 83–93. Edward Elgar, Cheltenham.

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