Political attention, fiscal capability, and commitment credibility: how Chinese local governments attract foreign direct investment

Abstract

The political economy of foreign direct investment (FDI) has traditionally focused on national-level political determinants. It is only in the recent decade that a growing, yet still small, strand of literature has begun exploring the dynamics between local governments and FDI. Despite its significant theoretical and empirical value, China as a case remains overlooked in the field. Drawing on Chinese experiences, this study investigates how political attention and fiscal capability at the local level influence FDI inflows. It posits that to investigate subnational FDI patterns in China from a political perspective is essentially to explore how commitment credibility varies across localities. It hypothesizes that by allocating more political attention to foreign businesses, Chinese local governments enhance their commitment credibility, which, in turn, boosts foreign investor confidence and attracts more FDI. In addition, as effective commitments in China are often associated with lavish incentives, greater fiscal capability also leads to increased credibility. As a preliminary assessment of the argument, the empirical analysis draws on a sample from Shanghai, arguably a hard test. Additionally, to capture political attention, an original dataset is compiled, which documents the meeting schedules of Shanghai’s leaders from 2013 to present. Statistical analysis on Shanghai data largely supports the argument, indicating that as local leaders allocate a larger proportion of meetings with multinational corporations (MNCs), contracted FDI increases, and as fiscal capability grows at a faster speed, increases occur both contracted and actual FDI. However, more meetings with MNCs have no measurable effect on actual FDI. A case study on Shanghai’s successful bid for Tesla’s Gigafactory in 2018 reaffirms the importance of fiscal capability and incentives in FDI location choice. Though preliminary, the empirical analysis is suggestive, warranting further investigation.