Conclusion
Subnational governments, particularly those in rapidly emerging economies like China, face two important questions when it comes to crafting public policies meant to attract FDI and FDI-related employment. First, do incentive programs attract higher levels of FDI-related activities to the region than what would have been experienced in the absence of the incentive? If so, is the size of the increase enough to justify the tax expenditure associated with the program? The second question becomes irrelevant if the answer to the first is no. We also note that the answers to these questions are of interest to national governments, if there is good reason to suspect that subnational governments are competing over economic activity in what is potentially a zero-sum game (Chirinko and Wilson 2008).
This study contributes to the ongoing literature considering FDI promotion policies by investigating the effects of several distinct types of locally adopted incentives on provincial-level FDI-related employment levels in China. After constructing a novel panel containing several types of local incentives, we model this relationship using the DSGMM approach developed by Blundell and Bond (1998). This mitigates several econometric challenges associated with panel data displaying both intravariation (within province over time) and intervariation (between provinces) for our policy variables of interest. In doing so, we provide a novel exploration of the relationship between FDI-related employment levels and FDI promotion policies at a provincial level in China. Policies of this nature are becoming increasingly popular in China and other rapidly developing economies; suggesting the previous lack of empirical analysis exploring their employment effects is problematic.
