Hard or soft? Institutional reforms and infrastructure spending as determinants of foreign direct investment in China

Series: Working Papers. 0616.

Author: K. C. Fung, Alicia García-Herrero, Hitomi Iizaka and Alan Siu.

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Hard or soft? Institutional reforms and infrastructure spending as determinants of foreign direct investment in China (556 KB)

Abstract

In this paper, we examine empirically whether hard infrastructure, in the form of more highways and railroads, or soft infrastructure, in the form of more market oriented institutions through deeper reform, lead to more foreign direct investment (FDI) in China. We use data of outward FDI from the United States, Japan, Hong Kong, Taiwan and Korea to various regions of China from 1990 to 2002. We control for the standard determinants of FDI, namely regional market size, wage rates, human capital and tax policies. We add indices of hard and soft infrastructure and find that soft infrastructure, in the form of more market oriented institutions through deeper structural reform, consistently outperforms hard infrastructure as a determinant of FDI.