Does 'Good Government' Draw Foreign Capital? Explaining China's Exceptional FDI Inflow

41 Pages Posted: 7 Dec 2006

See all articles by Joseph P. H. Fan

Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Bernard Yin Yeung

National University of Singapore - Business School

Lixin Colin Xu

World Bank - Development Research Group (DECRG)

Date Written: December 2006

Abstract

China is now the world's largest destination of 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. We conclude that Ockham's razor disfavors the last. We also note that, FDI may be elevated because Chinese institutions protected foreign firms better than domestic ones.

Keywords: FDI, China, institutions, growth

JEL Classification: F2, O1, O4 ,O5, E2

Suggested Citation

Fan, Po Hung Joseph P. H. and Morck, Randall K. and Yeung, Bernard Yin and Xu, Lixin Colin, Does 'Good Government' Draw Foreign Capital? Explaining China's Exceptional FDI Inflow (December 2006). Available at SSRN: https://ssrn.com/abstract=949906 or http://dx.doi.org/10.2139/ssrn.949906

Po Hung Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong
(852) 26097839 (Phone)
(852) 26035114 (Fax)

Randall K. Morck

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

National Bureau of Economic Research (NBER)

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United States

European Corporate Governence Institute ( email )

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Belgium

Asian Bureau of Finance and Economic Research ( email )

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1 Business Link
Singapore, 117592
Singapore

Bernard Yin Yeung

National University of Singapore - Business School ( email )

15 Kent Ridge Drive
BIZ 1 Level 6
Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

Lixin Colin Xu (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, N.W.
MC 3-427
Washington, DC 20433
United States
202-473-4664 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/cxu

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