Tobin’s Q and the Location of Foreign Direct Investment in China

Abstract

The aim of this paper is to examine the effects of the Chinese and Hong Kong stock markets on the levels of foreign direct investment into China’s regions, utilising dynamic panel estimation techniques. Using a Tobin’s Q measure, the results indicate that the effect is significant for both the Chinese and Hong Kong stock markets, but negatively signed, suggesting that FDI into China acts as a substitute for domestic investment. In addition we show that the Arellano-Bovver approach to dynamic panels produces an improvement into the modelling of FDI in China.