Davids Versus the Goliath: Locational Tournament for FDI Among Developing Countries

As the link between FDI and economic growth became evidently clear, the tournament among developing countries to attract greater amounts of FDI intensified. China has emerged as the front-runner, attracting between one fifth and one quarter of all FDI flowing into the developing world. In this paper we attempt to identify the determinants that makes China the lead country. We find that the market size and market growth are the only two determinants that catapult China into the lead. Other countries need to differentiate themselves in other areas, for instance by emphasizing policy initiatives and specializing in other types of investment like resource seeking, efficiency and strategic FDI.