Institutional opening and foreign investment commitment: evidence from China’s Free Trade Zones

Institutional opening has emerged as a significant policy instrument for shaping long-term investment decisions, particularly when the marginal effects of factor-based opening become less pronounced and foreign investment becomes increasingly sensitive to the institutional environment and policy expectations. This paper treats the establishment of a pilot free trade zone (FTZ) in a region with relatively weak institutional foundations as a quasi-natural experiment. Using provincial panel data from 2008 to 2022, this study applies the synthetic control method and the synthetic difference-in-differences method to test the impact of FTZ policies on the total investment of foreign-invested enterprises. The results show that FTZ policies significantly increased the total investment of foreign-invested enterprises in the treated province, with an average policy effect of approximately 34.4%. Further analysis indicates that this effect is primarily reflected in the growth in medium- and long-term investment arrangements rather than increases in current capital inflows alone. This finding suggests that institutional opening can promote foreign investment by enhancing investors’ expectations regarding institutional stability and policy predictability. Comparisons across regions also indicate that the effect is stronger in regions with relatively weak institutional foundations, whereas the marginal effect is smaller in regions with more developed institutional conditions.