Location Determinants of Foreign Direct Investment in Services: Do Agglomeration Economies Matter?

This article empirically investigates the role played by agglomeration economies as location determinants and provides explanations for the spatial distribution of foreign direct investment (FDI) in services in China from the perspective of regional characteristics. The generalised hypotheses on China’s FDI in services are tested utilising a panel data of 17 provinces and cities from 2000 to 2010. The results find evidence that agglomeration economies appear to be significant pull factors. Growth potential, purchasing power and development of service industry have significant positive effects. It is suggested that FDI in services is conducted to access domestic markets, rather than serve as an export platform. The analysis reveals that government intervention has a deterrent impact and makes agglomeration economies play a more important role in attracting FDI. Population density, labour quality and labour cost do not exert significant effects on FDI inflow in services.