International integration and regional development in China

Looking at international integration and regional development in China, this paper introduces a stylised model of regional development characterised by two pillars: (i) International integration indicated by Foreign Direct Investment (FDI), and (ii) domestic factors indicated by human and real capital available through interregional factor mobility. Its primary focus is on some of the side-effects of China’s rapid growth.

It is argued that while China’s high average growth is driven by a small number of rapidly developing provinces, the majority of provinces have experienced more moderate development. To obtain broad continuous growth, it is important to identify the determinants of provincial growth. Positive and significant coefficients for FDI and trade support the importance of international integration and technology imitation. A negative and significant lagged Gross Domestic Product (GDP) per capita indicates a catching up, non steady state process across China’s provinces. Highly significant human and real capital identifies the importance of these domestic growth restricting factors. However, other potentially important factors like labor or government expenditures are (surprisingly) insignificant or even negative. Further, in contrast to implications from New Economic Geography (NEG) models indicators for urbanisation and agglomeration do not contribute significantly.

Key points include that:

• based on the theoretical model all three kinds of capital, namely domestic physical capital, human capital and foreign capital, enter positively and significantly - to a large extent, these factors are responsible for the development of China’s provinces and hence of China as a whole
• China is characterised by increasing inequality - to ensure the China’s successful development can be maintained, it seems important to identify the determinants of provincial success
• international integration indicated by foreign direct investment and trade is significant and shows the predicted positive effects on growth - this result supports the underlying theory that these factors create technology spillover effects and promote productivity growth
• other factors also expected to contribute positively to development such as government expenditure and labor do not promote growth - according to the theory the negative effect of government expenditure can be regarded as over-investment in certain fields of government activities.