Foreign Direct Investment in China: Reward or Remedy?

20 Pages Posted: 5 Nov 2007

See all articles by Sandra Poncet

Sandra Poncet

Université Paris I Panthéon-Sorbonne; Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Olena Havrylchyk

CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris; Université Paris Ouest - Nanterre, La Défense - EconomiX

Abstract

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.

Suggested Citation

Poncet, Sandra and Havrylchyk, Olena, Foreign Direct Investment in China: Reward or Remedy?. The World Economy, Vol. 30, No. 11, pp. 1662-1681, November 2007. Available at SSRN: https://ssrn.com/abstract=1026746 or http://dx.doi.org/10.1111/j.1467-9701.2007.01076.x

Sandra Poncet

Université Paris I Panthéon-Sorbonne ( email )

12, place du Panthéon
Paris, IL
France

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 Rue Georges Pitard
Paris Cedex 15, F-75015
France

Olena Havrylchyk (Contact Author)

CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris ( email )

113 rue de Grenelle
Paris, F-75007
France

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
Nanterre cedex, Nanterre Cedex 92000
France

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