Policy Drivers of Inter-Regional Investment in China

Abstract

We examine how the policies of Chinese regional governments affect the investment location decisions of firms. Using a dataset compiled from the reports on the investment decisions of 498 listed Chinese companies headquartered in the provinces of Guangdong, Jiangsu, Shanghai, and Zhejiang, we estimate discrete choice models of the investment decisions of these firms. The variables of interest relate to government policies, but we also control for both market and firm characteristics. The provision of superior communications infrastructure leads to an increased probability of investment, as does a lower proportion of state-owned enterprises and a lower burden of regional government administrative expenses. We quantify potential changes in the probability of attracting investment by calculating the average marginal effects over a range of values of the variables of interest. Our extraction of primary data on firms directly from their annual reports allows us to address a gap in the literature with respect to the influence of regional government policies on investment decisions during a historical period (2000–2010) when inter-regional investment was particularly important as it saw a move to the decentralisation of decision making to regional government level. Our results provide useful guidance as to how local governments can best attract investment, namely by focusing on improving communications infrastructure, reducing government ownership of the means of production, and reducing administrative burden. Although there is currently a renewed focus on central government control, these findings remain relevant and can contribute to the ongoing debate concerning the optimal balance between centralisation and decentralisation.