This study provides an institutional explanation for the rapid growth of foreign investment in China since the mid-1990s. The argument is that this increase is caused by domestic institutional changes in China, including intensifying competitive liberalization among local governments, reorientation of the central elite toward stabilization and structural reforms in macroeconomic policies, and widening regional disparities during this period. The first factor encourages local governments to offer various concessions to foreign investors. The second factor maintains the macroeconomic stability conducive to the expansion of export-oriented foreign firms. Finally, the third factor, an unintended consequence of the previous two, supplies labor-intensive firms with abundant migrant workers from the impoverished hinterland. The combination of these three institutional features has helped to forge coastal China into a world production power-house since the mid-1990s.