Growth Pressures, Stimulus Plan, and Foreign Entry: A New Perspective on Understanding the Dynamics of Foreign Investment in China

ABSTRACT In response to the international financial crisis, China's actual utilization of foreign capital experienced a significant decline in 2009, followed by a rapid rebound that surpassed previous levels. This paper investigates the impact of the four‐trillion‐yuan stimulus package implemented by the Chinese government in 2008 on the dynamics of foreign investment. Our findings indicate that growth pressures drive local governments to actively utilize stimulus plans, thereby facilitating the entry of foreign firms. Mechanism tests reveal that the economic stimulus plan significantly encourages foreign entry through industrial land grants, while reductions in financing costs and tax incentives also play crucial roles. Furthermore, this study examines the heterogeneous effects of the economic stimulus plan on foreign firm entry, revealing a more pronounced impact on foreign investment from Hong Kong, Macao, and Taiwan (HMT FDI), as well as on foreign investment in coastal areas. This research offers a novel explanation for the dynamics of foreign investment in China from a macroeconomic policy perspective and contributes to the literature by evaluating the effectiveness of the economic stimulus package's implementation.