Summary:
Expanding high-level opening up through policy design is a major issue in China's open economic governance. As an important tool for attracting and utilizing foreign direct investment (FDI), FDI policy is an important means for the government to play the “visible hand” to achieve a high level of opening up. However, Some local governments have blindly imitated other local governments' FDI encouraging policies, ignoring the actual situation of the local economies, which has led to a series of economic distortions, such as local protection, market segmentation, and repeated construction. Why do local governments have such a strong incentive to formulate FDI encouraging policies？ And what kind of competition pattern and impact consequences does local governments' FDI encouraging policies present in the course of more than 40 years of FDI attraction？ In view of this, this paper, based on a long-term and dynamic perspective, examines the peer effect of Chinese prefecture-level municipal governments' FDI encouraging policies by constructing a database of China's FDI policies from 1978 to 2022, and systematically analyses the evolution pattern of local government's FDI policies in China, particularly the influencing factors and equilibrium outcomes of the competition of FDI encouraging policies. Specifically, this paper first constructs a game model covering local governments with domestic and foreign-funded enterprises. Theoretically, it analyses the peer effect of local governments in the existence of FDI encouraging policy; and, when the cost of FDI encouraging policy is too high, local governments will eventually withdraw from the FDI encouraging policy competition in the long term. Secondly, based on the dataset of China's FDI policies from 1978 to 2022 constructed in this paper, the empirical study finds that: (1) China's prefectural-level municipal governments introduce FDI encouraging policies not entirely based on their own conditions, but imitate other regions, and there exists a significant peer effect in prefectural-level municipal governments' FDI encouraging policies. (2) The “peer” targeted by the competition of FDI encouraging policies of prefecture-level municipal governments includes not only prefecture-level municipalities in the same province with “yardstick competition”, but also prefecture-level municipalities with similar geographic location, similar level of economic development and similar industrial structure. (3) Although there is blind imitation in the FDI encouraging policies of some local governments, the FDI encouraging policies of regions with rich experience in opening up and high degree of marketisation, as well as those regions with highly educated local leaders with rich working experience, are relatively independent. (4) Inter-regional competition in FDI incentives exists in both policy quantity and policy quality, and the central and western regions will eventually choose to withdraw from the competition in FDI incentives, while the eastern regions will strengthen the competition in FDI incentives. Compared with the existing literature, the contribution of this paper lies in the following: Firstly, this paper is the first to study the “peer competition effect” of local governments in China in terms of the quantity and quality of FDI incentives from the perspectives of theoretical analyses and empirical tests. By answering the questions of why the peer effect occurs in the FDI incentives of local governments, who they are imitating in their policy decisions, and how policy peer competition affects local governments' policy learning and shapes their FDI policies, this study reveals the evolutionary law of China's FDI policies, the dynamics and equilibrium results of policy competition, which is conducive to clarifying the directions and paths of actively and effectively utilizing FDI, and also provides useful policy insights for optimizing the FDI policies. In addition, this study reveals that the “self-interested” rational response of local governments leads to collective irrational results, which provides an important reference for understanding the behavior of local governments and constructing a business environment of fair competition between domestic and foreign capital. Secondly, from the theoretical level, the current research on the peer effect mostly focuses on corporate behavior and individual or family behavior. Based on the perspective of local government policy interaction, this paper extends the study of peer effect to international direct investment research. By analyzing the “peer effect” of Chinese local governments' FDI encouraging policies, this paper reveals the impact of local government policy competition on the evolution of FDI policies, which not only enriches the application scope of the peer effect theory, but also supplements the literature on the driving factors of the formulation and change of FDI policies. Third, in terms of research samples, existing studies on FDI policy often cover only a single type of FDI policy, involve a short period of time, and fail to provide a complete picture of the structural characteristics of FDI policy, its evolutionary pattern, and its long-term policy effects. This paper compiles information on China's FDI policy from 1978 to 2022 and constructs a FDI policy database covering the central level, provincial level and prefecture level. this is one of the most comprehensive databases for studying China's FDI policies with a complete time span.
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