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Working Paper No. 04-06

The Chaotic Attractor of Foreign Direct Investment - Why China? A Panel Data Analysis
Frank S.T. Hsiao and Mei-chu W. Hsiao
May 2004


We explain why China is a "chaotic" or "strange" attractor of FDI. It is an "attractor" because its FDI inflows increased steadily even though the world FDI inflows have decreased considerably in recent years. It is indeed "strange," since its rates of FDI return are below the world average and predictions of its economic collapse are abundant. We find that Hong Kong and Taiwan are predominant players (40 to 60% of total FDI), followed by the United States and EU, and the size of investment is generally very small. The concept of the China Circle should be expanded to the East Asia Circle, which is experienced by Taiwan and Korea in earlier decades. We also considered some important characteristics, including the regional distribution, geographic proximity, and cultural similarity of these countries. To avoid spurious regressions, we use panel unit root and cointegration tests developed in the last few years. The results from panel data regressions explain our observations quite satisfactorily.

JEL classification: F21; F23; C23; O53; F41
Keywords: FDI in China; determinants of FDI; economic crisis in China; cultural similarity, panel unit roots and cointegration tests