Foreign direct investment under weak rule of law: theory and evidence from China

Xiaozu Wang, Lixin Xu and Tian Zhu

No 5790, Policy Research Working Paper Series from The World Bank

Abstract: This paper develops a self-enforcing contract model to show that better economic fundamentals can help when there is weak rule of law -- but with order -- to attract foreign direct investment, whereas lowering taxes does not necessarily help. Using a cross-region Chinese dataset, the analysis finds evidence consistent with the theoretical analysis. Regional variations in tax rates and the perceived quality of formal contracting institutions are not correlated with regional inflows of foreign direct investment, but leadership characteristics are. Most conventional economic factors have the predicted effects on foreign direct investment. The finding that foreign direct investment is lower in locations where domestic private firms have better access to finance and where the air quality is poor is new to the literature.

Keywords: Debt Markets; Emerging Markets; Investment and Investment Climate; Bankruptcy and Resolution of Financial Distress; Access to Finance (search for similar items in EconPapers)
Date: 2011-09-01
New Economics Papers: this item is included in nep-dev, nep-ifn and nep-tra
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:5790

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