Factors Influencing the Foreign Direct Investment Inflow in the Service Sector in China

Ying Hong

doi:10.60027/ijsasr.2024.4328

Authors

Ying Hong Chulalongkorn University, Thailand https://orcid.org/0009-0009-6097-728X

DOI:

https://doi.org/10.60027/ijsasr.2024.4328

Keywords:

Foreign Direct Investment; , Service Sector; , Digitalization

Abstract

Background and Aim: With the development of informatization and industrial structure adjustment, the service sector has become an important pillar of many developed countries. However, compared with developed countries, China's service sector doesn’t account for a high proportion of GDP. As a developing country, China still needs foreign capital inflows to help it narrow the gap and promote the development of its service sector. Therefore, identifying the key factors especially digitalization that influence FDI inflow in China's service sector can help them improve the development level of the service sector and economic growth and transformation more quickly.

Materials and Methods: Dunning’s eclectic paradigm is a solid foundation for this paper. This paper applies the ARDL econometric model by using yearly data from 1992 to 2021 to examine factors influencing FDI inflows in the whole service sector in China. The data sources are National Bureau of Statistics of China and the World Bank.

Results: GDP per capita, unemployment rate, and the penetration rate of the mobile phone have significant effects on the inflows of the FDI in China’s whole service sector and the specific industry which is the wholesale and retail trade industry in the long-run and short-run. The results of residuals of the error correction model evidenced that the coefficients in these two models are stable.

Conclusion: Market size, unemployment, and especially the degree of digitalization are key factors influencing the FDI inflow in China’s service sector. The government and policymakers can attract FDI inflow by improving the market economy reform and prompting more job opportunities. At the same time, it is necessary to increase investment in R&D and innovation in science and technology and to emphasize the development of high-tech and knowledge-based industries. More research can be conducted on more service industries in the future.

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