China and Central & Eastern European Countries: Regional Networks, Global Supply Chain or International Competitors?

Journal of Economic Integration, Vol. 24, No. 3, pp. 476-504, September 2009

30 Pages Posted: 6 Jul 2011

See all articles by Francis Ng

Francis Ng

World Bank - Development Research Group (DECRG)

K. C. Fung

University of California at Santa Cruz

Iikka Korhonen

Bank of Finland - Institute for Economies in Transition (BOFIT)

Rick Ke Li

University of California, Santa Cruz

Date Written: September 30, 2009

Abstract

China has become one of the leading recipients of foreign direct investment (FDI). Meanwhile, an increasing share of global FDI is going to many Central and Eastern European countries (CEECs). What is the relationship between the 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 China’s FDI is positively related to CEECs’ FDI; and (3) FDI into China is a substitute for FDI into the CEECs, with the correlation being negative. In this paper, we study empirical estimates of this issue for 15 CEECs for China and Central and Eastern European Countries 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 regressions FDI flows in these two regions are moderately complementary. Our analysis also confirms the importance for FDI flows of determinants such as market size, degree of trade liberalization, labor quality and a healthy global FDI supply.

Keywords: foreign direct investment, FDI, regional networks, global supply

JEL Classification: F20, F21, F43

Suggested Citation

Ng, Francis and Fung, K.C. and Korhonen, Iikka and Li, Rick Ke, China and Central & Eastern European Countries: Regional Networks, Global Supply Chain or International Competitors? (September 30, 2009). Journal of Economic Integration, Vol. 24, No. 3, pp. 476-504, September 2009, Available at SSRN: https://ssrn.com/abstract=1879463

Francis Ng (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
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Washington, DC 20433
United States
202-473-8088 (Phone)
202-522-1159 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/fng

K.C. Fung

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
831-459-3273 (Phone)
831-459-5900 (Fax)

Iikka Korhonen

Bank of Finland - Institute for Economies in Transition (BOFIT) ( email )

P.O.Box 160
Helsinki 00101
Finland

Rick Ke Li

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064

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