European Union Foreign Direct Investment in China: Evidence from a Panel Study of EU Manufacturing Firms, 1998-2007

The paper examines determinants of the EU‘s FDI into the China by using a newly available Manufacturing firm-level data set for the period 1998-2007 from the State Statistical Bureau of China. The theoretical framework of the paper builds on Dunning's ownership–location–internalization (OLI) paradigm, incorporating the institutional determinants to test international production by EU firms in emerging market. The paper analyses recent trends and patterns of EU FDI and its firms‘ characteristics in China. This study applies both static and dynamic panel data approaches (fixed effects and GMM system estimators) to test the presence of agglomeration effect of past FDI. It finds that EU FDI in China is positively associated with export intensity and labour cost. However, technology and profitability of the firm show unexpected results, not lining with theory in the study. The results further suggest that locational factors with regard to macroeconomic and legal environment are also considered by EU firms when deciding on FDI in China. The findings have important implications for practitioners and policymaking.