| Zone-based corporate tax incentives have long been utilized by subnational governments in the United States and abroad. Their motivation stems from the idea that physical and human capital will be attracted, enhancing the size and resiliency of the local tax base. However, opponents of these highly controversial policies highlight the role of competition effects and argue an underlying prisoner’s dilemma dynamic characterizes decisions over local tax incentives (Ellis and Rogers 2000). Most of the current literature examines the effects of zone-based development incentives in the United States and other advanced economies. For example, enterprise zones (Boarnet and Bogart 1996; Neumark and Kolko 2010; Billings 2009), tax increment finance districts (Anderson 1990; Man and Rosentraub 1998; Dye and Merriman 2000), and empowerment zones (Hanson and Rohlin 2011; Ham et al. 2011) have received much attention from researchers. Surprisingly though, few studies have considered the effect of locally enacted zone-based tax incentives in developing economies, where they are also quite common. Since the 1978 structural reform of the Chinese economy, attracting foreign direct investment (FDI) has been a stated component of China’s overall economic strategy (Chen, Chang, and Zhang 1995). Whereas global FDI levels increased by a factor of 6 between 1990 and 2012, growth in China was over thirtyfold (figure 1). China’s share of global FDI grew from 2 percent in 1990 to over 17 percent in 2012.1 FDI contributed heavily to China’s overall growth, as about one-third of China’s aggregate gross domestic product (GDP) gains over the period can be attributed to increased levels of inward FDI.2 Predictably, several studies have investigated the determinants of FDI flows in China. Concurrent to the explosion of FDI has been the contribution of foreignowned firms to employment growth. The growth rate of FDI-related employment in China has been an astounding 14.6 percent annually since 1990, accounting for nearly 12.5 million workers by 2012 (China Statistical Yearbook 2013). Moreover, these are desirable jobs. Our data show FDIrelated employment salaries were ¥30,273 between 2000 and 2012, comparing favorably to state-owned enterprises (¥25,030) and Hong Kong–Macau– Taiwan firms.3 This inward FDI is heavily skewed toward the southeastern Pacific coast, where many of China’s biggest cities are located. |