【文章內(nèi)容簡介】 o be positive. We call this effect the “investmentcreation effect”. Theoretically we cannot determine a prior the effect of investmentcreation and investmentdiversion for China. It is thus important to examine this issue empirically, as we attempt to do in this paper. A substantial literature has developed confirming empirically the importance of the size of the host market and the growth factor measured by GDP per capita or GDP growth. The foreign investors that target the local market are assumed to be more attracted to the country with higher growth rate of GDP as it indicates a larger potential demand for their product. The effect of the variable on their investment incentive therefore is assumed to be larger than the effect on those who are not focusing on the domestic market. Furthermore, for the foreign investors who operate in industries characterized by relatively large economies of scale, the importance of the market size or it’s growth is magnified. This is because they can exploit scales economies only after the market attains a certain threshold size. As the variables (the growth of GDP and per capita GDP) are used as indicators for the market size and the potential for the products of foreign investors, the expected signs for these variables are positive. Since the cost of labor is a major ponent of the cost function, various versions of the wage variables are frequently tested in the literature. A high wage, other things being equal, deters inward foreign direct investment (FDI). This must be particularly so for the firms which engage in laborintensive production activities. Therefore, conventionally, the expected sign for this variable is negative. However, there are no consistent empirical results for the effect of labor cost on the investment incentives. While some econometric studies have shown no significant role of labor costs, others have shown the positive relationship between labor costs and FDI. The latter result is often attributed to a level of labor productivity or quality of human capital that may be reflected in the wage variables. The level of human capital is demonstrated to be an another important determinant of the marginal productivity of capital. It has been shown in various studies that skillrelated variables are host country specific. When a host country is more appealing to laborintensive foreign investment that requires a relatively lower level of skills, the importance of the human capital variable tends to be small. On the other hand, labor skills can be a more significant factor for a host country, in which more capital and technology intensive investment projects are concentrated. In this analysis, we utilize illiteracy rate as a proxy for the level of human capital. We examine the hypothesis that better developed regions with a superior quality of infrastructure are more attractive to foreign firms relative to others by including in our regressions the proxy, the number of telephone mainlines per 1000 people. We also examine the significance of institutional factors in the determination of FDI by incorporating the level of corruption and the stability of each government. Corruption can discourage FDI by inducing a higher cost of doing business. Hines (1995) shows that FDI from the United States grew more rapidly in less corrupt countries than in more corrupt countries after 1977. Wei (1997) presents alternative explanation of the large negative and significant effect of corruption on FDI. Unlike taxes, corruption is not transparent and involves many factors that are more arbitrary in nature. The agreement between a briber and a corrupt official is hard to enforce and creates more uncertainty over the total questionable payments or the final oute. Wei demonstrates that this type of uncertainty induced by corruption leads to a reduction in FDI. Political stability of a government can be another important factor to foster the inflow of FDI Uncertain political environments and their related risks can impede FDI inflows in spite of favorable economic conditions. Since the indices of corruption and instability assign higher scores to less corrupt or more stable country, the expected signs of the variables, ACORRUPT and AGOV, are positive. Also included in the analysis are policyrelated variables, tariff barriers proxied by import duty, corporate tax rates, and openness to foreign trade. The effect of tariffs on the behavior of multinational enterprises (MNEs) is methodologically demonstrated by Horst (1971). He predicts that in the face of higher tariffs imposed by the host countries, other things being equal, MNEs will increase its production abroad and decrease its exports. More recent mode