Foreign Direct Investment and Special Zone Policy in China.

Why have large volumes of FDI streamed into China even though its political institutions seem not able to credibly commit on any long-term policy? Why have special zones been enduringly popular among foreign investors? I argue that China attracts massive amounts of FDI partly because of the authoritarian system that gave political elites the flexibility and capacity to initiate the special zone policy to attract FDI. But China's continuing success in attracting higher quality FDI owes much to the government's credibility of maintaining this policy. Both the central and local governments have strong political motivations to maintain the policy, which creates a self-enforcing solution to this credibility problem. FDI patterns over time reflect foreign investors' response to the change in policy credibility in China. At the initial stage of the open-door policy, foreign investments were mostly small, labor-intensive, and low-tech. When the Chinese government gradually built up credibility on the special zone policy, foreign investors were more involved in large-scale operations in the technology-intensive sectors aimed at penetrating the domestic market. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]