Introduction

In recent years, PRC has become a favorite destination for foreign direct investment (FDI). In 2002, foreign direct investment in PRC reached US$53 billion. For 2003, despite the problems associated with SARS (Severe Acute Respiratory Syndrome), PRC received US$54 billion worth of foreign direct investment (UNCTAD 2004). PRC has become one of the top recipients of FDI in the world.

PRC is on its way to become "the factory of the world". The success of PRC in attracting foreign direct investment is no accident. One of the earliest strategic policy reforms of PRC was to open up the South to lure foreign investors. PRC's attempts to introduce markets into its economy go hand in hand with the liberalization of its FDI regime. In some ways, foreign direct investment reforms can be seen as the vanguard of domestic market reforms.

While increases in FDI from the outside world are complementary to PRC's efforts to modernize its economy, many developing countries in the world seem to be very worried about the prospects of a rising PRC that absorbs more and more of the investment from major multinationals. Several governments in Asia and Latin America have publicly noted that the emergence of PRC has diverted direct investment away from their economies. Policymakers and analysts in the developing world are convinced that the rise of PRC has contributed to the “hollowing out” phenomenon, with foreign and domestic investors leaving their countries and investing in PRC instead. This in turn has led to continued loss of manufacturing industries and jobs, further weakening the vitality of these economies.¹

In this paper, we would like to examine empirically the question of whether the successful FDI policy of PRC has diverted foreign direct investment away from a group of Asian and Latin American economies. In Asia, the economies we will consider include Hong Kong, China, Taipei,China, Republic of Korea, Singapore, Malaysia, Indonesia, Philippines and Thailand. In Latin America, the economies we study include Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela. The research strategy is to control for the standard determinants of foreign direct investment and then add a proxy to represent "the PRC Effect". We then would investigate the sign, significance and magnitude of such a "PRC Effect".

The organization of this paper is as follows. In the next section, we will provide some background discussions related to foreign direct investment in PRC in general. In section 3, we then survey the relevant policy issues. In section 4 we examine the current academic literature of the determination of FDI. In section 5, we set up the empirical model to be estimated. In section 6, we present and discuss our results. Section 7 concludes.

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