Institutions and Foreign Investment: China versus the World

Joseph P.H. Fan, Randall Morck, Lixin Xu and Bernard Yeung

No 13435, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Weak institutions ought to deter foreign direction investment (FDI), and mass media stories highlight China's institutional deficiencies, yet China is now one of the world's largest FDI destinations. This incongruity characterizes China's paradoxical growth. Cross-country regressions show that China's FDI inflow is not exceptionally large, given the quality of its institutions and its economic track record. Institutions clearly determine a country's allure as an FDI destination, but standard measures of institutional quality can be problematic for countries undergoing rapid institutional development, and can usefully be augmented by economic track record measures. Deng Xiaoping's 1993 "southern tour" heralded sweeping reforms, and this regime shift is insufficiently reflected in commonly used measures of institutional quality. China's FDI inflow surge after these reforms resembles similar post-regime shift surges in the East Bloc, and so is also unexceptional. Recent arguments that China's FDI inflow is inefficiently large because weak institutions deter domestic investment while special initiatives attract FDI are thus either unsupported or not unique to China.

JEL-codes: F21 F23 G15 G38 O19 O43 O53 P34 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-cna, nep-dev, nep-sea and nep-tra
Note: CF
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Citations: View citations in EconPapers (3)

Published as Fan, Joseph P.H. & Morck, Randall & Xu, Lixin Colin & Yeung, Bernard, 2009. "Institutions and Foreign Direct Investment: China versus the Rest of the World," World Development, Elsevier, vol. 37(4), pages 852-865, April.

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