Pilot free trade zones and FDI inflows: Direct and spatial spillover effects among Chinese cities
Year: 2026
Type: article
Abstract: Place-based institutional reforms are a widely used development policy. This paper estimates local and spatial spillover effects of China’s Pilot Free Trade Zones (FTZs) on city-level foreign direct investment (FDI) using a balanced panel of 265 prefecture-level cities from 2000 to 2021. We estimate a Spatial Durbin Model (SDM) and apply a general-to-specific procedure to select the spatial specification supported by the data across ten spatial weight matrices. The SDM yields a consistently insignificant coefficient on the spatial lag of FTZ status, providing no clear evidence that the FTZ policy environment in neighbouring cities is directly associated with FDI in the focal city. In contrast, Spatial Autoregressive (SAR) estimates yield a robust positive spatial autoregressive coefficient, indicating positive spatial dependence and FDI agglomeration across cities. Thus, establishing FTZs is significantly and positively associated with FDI inflows to treated cities and with higher FDI in nearby cities, consistent with regional propagation through intercity economic linkages rather than direct policy spillovers. Mechanism tests suggest the local (direct) association of FTZs with FDI operates partly through increases in local fiscal science and technology expenditure and tertiary sector expansion. At the same time, spatial agglomeration is related to industrial similarity and complementarity. Heterogeneity analyses are consistent with, from a substantive viewpoint, stronger associations for earlier FTZ batches and inland FTZs with FDI.
Authors: Yan Zhoufu, Leibrecht Markus, Li Lingzhi
Language: English
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $1,930
OpenAlex ID: W7223404213