BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 9/2008:
China and Central and Eastern European Countries: Regional networks, global supply chain or international competitors?
K.C. Fung, Iikka Korhonen ()
, Ke Li and Francis Ng
Abstract: China has emerged as one of the world's leading recipients
of foreign direct investment (FDI). Meanwhile, the successful transition
experience of many Central and Eastern European countries (CEECs) also
enables them to attract an increasing share of global foreign investment,
particularly from the European Union (EU). What is the relationship between
inward FDI of China and the CEECs? We conceptualize the relationship
according to three alternative paradigms: 1) China and the CEECs each exist
in its own regional production network, with no linkage between FDI flows
into China and into CEECs; 2) China and the CEECs together comprise a
global production network, so that FDI into China is positively related to
FDI into CEECs; and 3)FDI into China is a substitute for FDI into the
CEECs, so that the correlation between them is negative. In this paper, we
employ panel data to study this issue in detail. Specifically, we compare
empirical estimates for 15 CEECs over the 15-year period 1990-2004 using
four different econometric approaches: FGLS with Random effects, FGLS with
fixed effects, EC2SLS and GMM. The result supports the conclusion that
China's inward FDI does not crowd out CEECs' inward FDI. In fact, it shows
that in some circumstances FDI flows in these two regions are moderately
complementary. In addition, our analysis confirms the importance for FDI
flows of recipient-country characteristics such as market size, degree of
trade liberalization and labor quality, as well as a healthy global capital
market.
Keywords: foreign direct investment (FDI); regional networks; global supply chain; China’s FDI; Central and Eastern European Countries’ FDI; (follow links to similar papers)
JEL-Codes: F20; F21; F43; (follow links to similar papers)
42 pages, June 17, 2008
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