Description: Does "Good Government" Draw Foreign Capital? Explaining China's Exceptional Foreign Direct Investment Inflow

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Does "Good Government" Draw Foreign Capital? Explaining China's Exceptional Foreign Direct Investment Inflow

China is now the world's largest destination of foreign direct investment (FDI), despite assessments highlighting its institutional deficiencies. But this FDI inflow corresponds closely to predicted FDI flows into China from a model that predi...

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Bibliographic Details
Main Authors:	Fan, Joseph P. H., Morck, Randall, Xu, Lixin Colin, Yeung, Bernard
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ACTIONS AGENCY PROBLEMS BENCHMARK BENCHMARKS BUREAUCRACY CAPITAL FLOWS CAPITAL MARKET CAPITAL MARKETS CODES CONTRACTUAL ARRANGEMENTS CORRUPTION CROSS-COUNTRY ANALYSES CROSS-COUNTRY ANALYSIS CROSS-COUNTRY DATA DECISION MAKING DEMOCRACY DIRECT INVESTMENT INFLOW DISCLOSURE DOMESTIC FIRMS ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC OUTCOMES ECONOMIC PERFORMANCE ECONOMIC RESEARCH ECONOMIES OF SCALE ELECTION EMBEZZLEMENT ETHICAL STANDARDS EXCHANGE RATE EXPROPRIATION FDI FIXED INVESTMENT FOREIGN CAPITAL FOREIGN COMPANIES FOREIGN DIRECT INVESTMENT FOREIGN DIRECT INVESTMENTS FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN OPERATION FOREIGN OPERATIONS GDP GDP PER CAPITA GLOBAL ECONOMY GROWTH POTENTIAL GROWTH RATE HOST COUNTRY INEFFICIENCY INFORMATION ASYMMETRY INVESTMENT PROJECTS INWARD FOREIGN DIRECT INVESTMENT LATIN AMERICAN LEGAL PROTECTION LEGAL SYSTEM MACROECONOMIC STABILITY MANUFACTURING SECTORS MARKET ACCESS MARKET FAILURE MASS MEDIA MONARCHY MONOPOLY MULTINATIONAL FIRMS NPV POLITICAL DEBATE POLITICAL ECONOMY POLITICAL SYSTEM PRIME MINISTER PRIVATE PROPERTY PROPERTY RIGHTS PUBLIC INVESTMENT PUBLIC OFFICIALS PUBLIC POLICY QUALITY OF LAWS RULE OF LAW RULINGS TRANSPARENCY TRINIDAD AND TOBAGO WAGES
Online Access:	http://documents.worldbank.org/curated/en/2007/04/7537759/good-government-draw-foreign-capital-explaining-chinas-exceptional-foreign-direct-investment-inflow http://hdl.handle.net/10986/7062

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Summary:	China is now the world's largest destination of foreign direct investment (FDI), despite assessments highlighting its institutional deficiencies. But this FDI inflow corresponds closely to predicted FDI flows into China from a model that predicts FDI inflow based on government quality indicators and controls and is estimated across a sample of other weak-institution countries. The only real discrepancy is that, if government quality is measured by constraints on executive power, China receives somewhat more FDI than the model predicts. This might reflect an underestimation of the strength of these constraints in China, a unique institutional setting for FDI operations, FDI based on expected future institutional improvements, or a unique Chinese model of development. The authors conclude that Ockham's razor disfavors the last. They also note that FDI may be elevated because Chinese institutions protect foreign firms better than domestic ones.