The Impact of Governance on Chinese Inward FDI: The Generalized Method of Moments Technique

Abstract

This study estimated the relationship between governance indicators and the inward flow of foreign direct investment (FDI) in China. We examined the relationship for the period between 2002 and 2019 using various estimation regression techniques, including fixed effect model and the generalized method of moments (GMM). The study confirms a significant relationship between the flow of foreign direct investment and good governance. More specifically, this study reports a positively significant relationship between control of corruption, rule of law, and regulatory quality with the flow of foreign investment in China. However, government effectiveness, political stability, and voice & accountability reported no significant relationship, which makes sense in China’s case. China, which has a one-party government, does not need to focus on these variables. The paper holds policy implications for other countries, especially those located in Asia, to adhere to the governance indicators to attract higher foreign direct investments, as these countries possess both cheap and abundant labor.