Abstract

This study investigates the determinants of foreign direct investment (FDI) sectoral allocation in 29 manufacturing sectors in China from 2000 to 2007. We find that FDI sectoral allocation has a strong self-reinforcing effect. Multinational corporations with ownership advantages tend to invest more in local high-productivity sectors. The FDI presence, however, is discouraged in China’s high-productivity sectors in which the major market share is dominated by state-owned enterprises. We also find that the degree of FDI penetration is higher in sectors that are producing labour-intensive goods and also export oriented.