Gradual Financial Liberalization, Fdi, and Domestic Investment: Evidence From China's Panel Data

Qichun He

Journal of Developing Areas, 2012, vol. 46, issue 1, 1-15

Abstract: We argue that how inward foreign direct investment (FDI) affects domestic investment (DI) depends on the degree of financial deregulation. Utilizing the Chinese experience and its panel data, instrumenting FDI with weather indicators (validity supported by over-identification tests), our limited-information maximum likelihood (LIML) results suggest that both FDI and its interaction with financial deregulation have a significant negative effect on DI. It means FDI significantly crowds out DI in China, and higher degree of financial deregulation reinforces the crowding-out effect. The results are robust even after controlling for other growth factors, and time and province effects.

Keywords: Foreign Direction Investment; Gradual Financial Deregulation; Interaction; Crowding out; Panel Data (search for similar items in EconPapers)
JEL-codes: C23 F21 O16 (search for similar items in EconPapers)
Date: 2012
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