FDI Flows to Latin America, East and Southeast Asia, and China: Substitutes or Complements?

Is China diverting foreign direct investment (FDI) from other developing countries? Theoretically, a growing China augments other countries' FDI by creating more production networking and raising demand for resources. However, low Chinese costs lure multinationals away from other production sites. Here we explore this issue empirically. We focus on East and Southeast Asia and Latin America for 1985-2002. We control for the standard determinants of inward FDI, then add China FDI to represent the "China Effect." We found that China's FDI is positively related to FDI in Asia, while the China Effect is insignificant for Latin America. Also the China Effect is generally not the most important determinant of other countries' FDI. Market sizes and policies such as corporate tax rates and openness tend to be more important.