China & World Economy / 49–72, Vol. 29, No. 2, 2021

Dialect Diversity and Foreign Direct Investment in China

Wei Feng, Yanrui Wu, Yue Fu

Abstract

This paper examines the relationship between dialect diversity and foreign direct investment (FDI) using a dataset of 230 Chinese cities for the period 2000–2014. We find that dialect diversity and FDI absorption are negatively correlated. However, this negative relationship disappears gradually over time. Several underlying mechanisms are identified. In particular, it is found that dialect diversity impedes human capital development and hence obstructs FDI absorption. Our results also show that there are threshold and spatial spillover effects. This research increases knowledge of FDI location choice and has implications for foreign investment policymaking.