FDI and tax income of Chinese cities: a spatial panel analysis based on data of 221 cities

LU Jian1 YANG Binyong1

(1.International Business School, Southwest University of Finance and Economics (SWUFE))

【Abstract】By building a spatial econometric model based on the geographical distance among the 221 cities in China from 2003 to 2011, this paper examines whether FDI inflow increases the tax reveune of cities in China. It is found that FDI has a negative impact on tax increase, with 1% increase in FDI resulting in 0.31% to 0.37% decrease in tax income. The tax income of a city has a significantly positive corelation with that of the neighboring cities, possibly as a result of the economic policies for attracting foreign investment introduced by local governments such as various tax breaks and tax incentives to improve employment, promote regional GDP growth or boost administrative achievements. While these preferential policies can promote GDP growth, they could inevitably bring about the loss of financial resources of the local governments which may put the local government into “prisoner' s dilemma.” To address this, local governments should coordinate their policies on FDI and manage to promote the tax revenue growth while enhancing the economic development.

【Keywords】 FDI; tax income; spatial econometric model; policy competition;


【Funds】 National Social Science Foundation Youth Project (13CJL067) Humanities and Social Sciences Youth Foundation Project of the Ministry of Education (12YJC790132) Innovation Team Research Project of "Funds for Central Universities" of Southwestern University of Finance and Economics (JBK130504)

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(Translated by ZHAO Shichen)


    [1]. 1 See Eric W.Bond et al.(1986). [^Back]

    [2]. 2 Race to the bottom: a phrase to describe by depriving labour, consuming resources and damaging the environment to achieve growth. [^Back]

    [3]. 3 By introducing the (n-1) dummy variables in the original equation (n dummy variables will be introduced if there is no intersectional unit present) to represent different element. This is to fulfil the strong hypothesis of various disturbance terms are unrelated to the explanatory variables at different phases. Under this hypothesis, an estimation of individual heterogeneity ui can be reached. [^Back]


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This Article


CN: 11-1692/F

Vol , No. 09, Pages 3-13

September 2015


Article Outline


  • Introduction
  • 1. Literature review
  • 2 Empirical methodology and data explanation
  • 3 The empirical results analysis
  • 4. Conclusion
  • Footnote