The Promotion Effect of China (Shanghai) Pilot Free Trade Zone Policy on Foreign Investment Based on Nonparametric Synthetic Control Method

Abstract

This paper uses the Nonparametric Synthetic Control Method to study the dynamic impact of free trade zone (FTZ) policy on attracting foreign direct investment (FDI) by taking the Shanghai pilot free trade zone as a case. Empirical results show that the pilot free trade zone policy increased the stock of foreign direct investment in Shanghai by 205.26 billion Yuan from 2013 to 2015, with an average annual spillover of 68.42 billion Yuan, and an average annual spillover rate of 14.2 percent; and the cumulative flow of foreign direct investment in Shanghai increased by 133.06 billion Yuan, with an average annual spillover of 44.35 billion Yuan and an average annual spillover rate of 116.2 percent. A series of robustness tests, such as synthetic control method and double difference method, show that the pilot free trade zone policy has a positive spillover effect on attracting foreign investment in the region, and the empirical conclusion is robust. Keywords—program evaluation; nonparametric synthetic control method; China (Shanghai) Pilot Free Trade Zone; FDI effect