The Influence on Finance Competition of Local Governments to Foreign Direct Investment Inflows in China

Based on statistics data from 1987 to 2007 in China, this paper, using spatial panel data model, has conducted an empirical study of the influence factors on finance competition of local governments to foreign direct investment (FDI) inflows. The results show that tax competition and expense competition, two widely-used finance competition tools for absorbing FDI, have different promotion to FDI inflows. Expense competition is significantly positive correlated to FDI inflows, but tax competition is not significant. Furthermore, competition tool selection is correlate with time span and economic development level in China. On the one hand, judging from the time aspect, on a nation wide scale, the use of competition tools have changed from tax competition to expense competition since the 1994 fiscal decentralization reform in view of FDI inflows competition. On the other hand, judging from the regional aspect, the developed regions tend to use expense competition tool, while the underdeveloped ones remain preferential tax policy for absorbing FDI.