Partnering with the State: Historical Legacies, the Local State Sector, and Foreign Direct Investment in China.

How does the size of local state-owned sector affect the flow of foreign direct investment (FDI) to that region? Using an original county-level dataset for China's Yangtze Delta Region, this article finds that counties inheriting a larger state-owned sector from the planned-economy era have attracted more FDI since the outset of the market reform. The article argues that early foreign investors tended to invest in locales with a robust state sector to build joint ventures with local state-owned firms, as doing so helped them satisfy state regulations and reduce various political and market risks. The legacies of the planned economy also shaped local states' preferences, leading to persistent variations in local economic structure. An instrumental variable analysis suggests that the association is likely causal. [ABSTRACT FROM AUTHOR]