Thursday, 1 November 2007

FDI in China and Credit Constraints

Intersting new take on FDI in China related to the alleviation of credit constraints.

Foreign Direct Investment in China: Reward or Remedy?

* Olena Havrylchyk 11CEPII, Paris and and
* Sandra Poncet 22Université Paris 1 and CEPII

1CEPII, Paris and 2Université Paris 1 and CEPII


This paper tests the significance of FDI as a way to alleviate credit constraints. Incoming foreign investment provides additional sources of capital. Specifically in the Chinese case, enterprises may look for foreign investors, being constrained in their activity due to distortions in the state-dominated system. First, the Chinese financial system allocates resources to the least efficient firms – state-owned enterprises – while denying the same resources to Chinese private enterprises, forcing them to look for a foreign investor. Second, the inefficient system of state investment planning leads to mismanagement of public enterprises, increasing ‘insolvency-induced FDI’. We propose to analyse determinants of FDI in Chinese provinces to test the above hypotheses. We control for traditional determinants of FDI such as market access, labour costs, productivity, infrastructure, reform advances and banking sector size in order to assess the impact of inter-provincial heterogeneity in terms of the access that private enterprises have to credit and the distortive management in state-owned firms.

No comments: