Fiscal Residuum and Localization of Foreign Direct Investments among Chinese Provinces

This paper examines the impact of fiscal residuum—the excess of expenditure benefits over tax burdens—on the location choice of foreign direct investments among China’s provinces. Using data provided by the National Bureau of Statistics of China we propose two fiscal residuum indexes for China’s provinces over the period 1998–2004. According to Buchanan’s original definition of fiscal residuum a first index is given by the difference between government expenditure and revenue. A second index measures enterprises’ net fiscal benefit and is calculated as the difference between public expenditure that affect business activities and taxes paid by enterprises. We found that the first index does not significantly affect the FDI localization choice while the second one positively affects it. When looking at different subsets of provinces we found that for eastern provinces the first index has a positive and significant effect. These results confirm the role of the net fiscal benefit as a determinant of FDI inflows at the provincial level.