Conclusion

PRC's development strategy to attract foreign firms has been a huge success. Its external "open door" reforms are complementary to its internal policies to privatize its economy. But is PRC's FDI policy detrimental or complementary to attempts by other economies in Asia and Latin America to attract more foreign direct investment? In other words, is PRC diverting foreign direct investment away from other Asian and Latin American economies? This is the paramount question on the minds of many academic researchers as well as policymakers in Latin America and Asia.

Theoretically, the emergence of PRC can have both investment-creating effects as well as investment-diverting effects. In this paper, we examine this issue empirically. We use data for eight Asian economies (Hong Kong, China, Taipei,China, Republic of Korea, Singapore, Malaysia, Philippines, Indonesia and Thailand) and data from sixteen Latin American economies (Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela) and estimate the determinants of foreign direct investment inflows in these economies. The standard determinants we consider include market size variables (real GDP growth rates, growth rates of real per capita income and GDP), policy variables (the degree of openness, corporate tax rates, import duties, quality of infrastructure) institutional characteristics (indices of corruption, degrees of government stability, indices of the rule of law), labor market conditions (illiteracy rates and wage rates) as well as the global supply of FDI. To estimate the PRC Effect, we include in the empirical equations the levels of PRC's inward foreign direct investment. As PRC's foreign direct investment should also be dependent on foreign direct investment in other Asian and Latin American economies and other similar policy and institutional factors, we use a panel regression simultaneous equation model to estimate our coefficients, paying particular attention to the estimated coefficient of the PRC Effect.

The main results of our paper are as follows. First, in terms of the levels of foreign direct investment flows, the PRC Effect is positive for the East and Southeast Asian economies. For the Latin American economies, the PRC Effect is mostly insignificant and occasionally mildly positive. In other words, foreign direct investments to our Asian economies are positively related to direct investment into PRC, while foreign direct investments to the Latin American economies have little systematic relationship with direct investment going into PRC.

These results are consistent with the view that there is a thick and growing production network within these Asian economies and PRC, but except for Mexico, there is relatively little vertical production-sharing among the Latin American countries. Thus multinationals may want to set up factories and distribution network in both PRC and other parts of Asia to accommodate their increasingly sophisticated global supply chains, but they do not seem to view PRC and Latin America systematically as rival, alternative sites of business networks. Second, in terms of the shares of developing countries' foreign direct investments, the PRC effect is negative for both the East and Southeast Asian economies as well as for the Latin American economies. Thus while both the level of PRC's foreign direct investment and the levels of foreign direct investments of our Asian economies are increasing together and there is no strong relationship between foreign direct investment into PRC and into Latin America, an increase in PRC's investment is associated with a decline in the Asian and Latin American shares of foreign direct investment of all developing economies. Third, the PRC effect is in general not the most important factor determining the inflows of foreign direct investments into these economies. Specifically, market size variables and policy variables such as the lower corporate taxes and higher degrees of openness play larger roles in attracting investment.

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