Government Officials’ Career Incentives and FDI Inflows in China

HKUST IEMS Thought Leadership Briefs No. 49

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Danqing Wang

Political institutions do not only generate risks for foreign investors, they also offer opportunities. One mechanism is through structuring government officials’ career incentives by relating their promotion with the volume of FDI attracted. In China, we found that cities governed by newly appointed government leaders who have a higher political incentives for further promotion, attracted on average 518.70 million yuan more FDI than cities governed by leaders who continued their term in the same position. Among those newly appointed leaders, their incentives further vary, hence influencing their motivation and efforts of attracting FDI. We found that their incentives decrease if they are close to retirement, while the motivation is greater if they are appointed to cities with low prior GDP performance. Taken together, we present an agentbased explanation to account for the intra-country heterogeneities of FDI inflows

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