Regional Decentralisation and Location of Foreign Direct Investment in China

China's economic transition is essentially a two-pronged decentralisation process: power and fiscal decentralisation from central to local government and shift of decision making from governments to firms and households. Using FDI flow data at the provincial level from 1995 to 2002, this study finds that provinces with more authority in economic matters and hardening fiscal budget constraints have a larger FDI inflow. Market decentralisation may significantly improve the investment environment and attract foreign investment while government interference in economic activities could discourage foreign investment. In addition, more legal spending in a province is associated with a smaller FDI inflow while subsidies to loss-making SOEs could bring more foreign investment.