Institutions and Foreign Investment: China Versus the World

Interesting NBER paper looking at the apparent paradox between FDI inflows and the state of China's institution. One would expect a negative correlation. The conclusions of this paper are intuitive and should not be surprising to those with a good knowledge of China.

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"Institutions and Foreign Investment: China Versus the World"
NBER Working Paper No. W13435


Contact: JOSEPH P.H. FAN
Chinese University of Hong Kong - School of
Accountancy
Email: pjfan@cuhk.edu.hk
Auth-Page: http://ssrn.com/author=28125

Co-Author: RANDALL MORCK
University of Alberta - Department of Finance and
Management Science, National Bureau of Economic
Research (NBER)
Email: randall.morck@ualberta.ca
Auth-Page: http://ssrn.com/author=71368

Co-Author: LIXIN COLIN XU
World Bank - Development Research Group (DECRG),
Peking University - Guang Hua School of Management
Email: LXU1@worldbank.org
Auth-Page: http://ssrn.com/author=122631

Co-Author: BERNARD YIN YEUNG
New York University - Department of Economics
Email: byeung@stern.nyu.edu
Auth-Page: http://ssrn.com/author=71371

Full Text: http://ssrn.com/abstract=1016346

ABSTRACT: Weak institutions ought to deter foreign direction
investment (FDI), and mass media stories highlight China's
institutional deficiencies, yet China is now one of the world's
largest FDI destinations. This incongruity characterizes China's
paradoxical growth. Cross - country regressions show that China's
FDI inflow is not exceptionally large, given the quality of its
institutions and its economic track record. Institutions clearly
determine a country's allure as an FDI destination, but standard
measures of institutional quality can be problematic for
countries undergoing rapid institutional development, and can
usefully be augmented by economic track record measures. Deng
Xiaoping's 1993 southern tour heralded sweeping reforms, and this
regime shift is insufficiently reflected in commonly used
measures of institutional quality. China's FDI inflow surge after
these reforms resembles similar post-regime shift surges in the
East Bloc, and so is also unexceptional. Recent arguments that
China's FDI inflow is inefficiently large because weak
institutions deter domestic investment while special initiatives
attract FDI are thus either unsupported or not unique to China.