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

40 Pages Posted: 20 Apr 2016  

Joseph P. H. Fan

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

Randall Morck

National Bureau of Economic Research (NBER); University of Alberta - Department of Finance and Statistical Analysis

Bernard Yin Yeung

National University of Singapore - Business School

Lixin Colin Xu

World Bank - Development Research Group (DECRG)

Date Written: April 1, 2007

Abstract

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.

Keywords: Foreign Direct Investment, Economic Theory & Research, Legal Products, Investment and Investment Climate, Parliamentary Government

Suggested Citation

Fan, Joseph P. H. and Morck, Randall and Yeung, Bernard Yin and Xu, Lixin Colin, Does 'Good Government' Draw Foreign Capital? Explaining China's Exceptional Foreign Direct Investment Inflow (April 1, 2007). World Bank Policy Research Working Paper No. 4206. Available at SSRN: https://ssrn.com/abstract=980824

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 (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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)

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

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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