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Foreign Direct Investment in China: Reward or Remedy?

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  • Sandra Poncet
  • Olena Havrylchyk

Abstract

This paper tests the significance of FDI as a way to alleviate credit constraints. Incoming foreign investment provides additional sources of capital. Specifically in the Chinese case, enterprises may look for foreign investors, being constrained in their activity due to distortions in the state-dominated system. First, the Chinese financial system allocates resources to the least efficient firms - state-owned enterprises - while denying the same resources to Chinese private enterprises, forcing them to look for a foreign investor. Second, the inefficient system of state investment planning leads to mismanagement of public enterprises, increasing 'insolvency-induced FDI'. We propose to analyse determinants of FDI in Chinese provinces to test the above hypotheses. We control for traditional determinants of FDI such as market access, labour costs, productivity, infrastructure, reform advances and banking sector size in order to assess the impact of inter-provincial heterogeneity in terms of the access that private enterprises have to credit and the distortive management in state-owned firms. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd .

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Bibliographic Info

Paper provided by CEPII research center in its series Working Papers with number 2006-14.

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Date of creation: Aug 2006
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Handle: RePEc:cii:cepidt:2006-14

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Keywords: Banking system; FDI; Credit; Monetary policy; International integration;

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References

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  1. K. C. Fung & Alicia Garcia-Herrero & Hitomi Iizaka & Alan Siu, 2005. "Hard Or Soft? Institutional Reforms And Infrastructure Spending As Determinants Of Foreign Direct Investment In China," The Japanese Economic Review, Japanese Economic Association, vol. 56(4), pages 408-416.
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Citations

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Cited by:
  1. Octavio Escobar, 2011. "The location pattern of FDI in Mexico after NAFTA," ERSA conference papers ersa10p804, European Regional Science Association.
  2. Sandra, PONCET & Walter, STEINGRESS & Hylke, VANDENBUSSCHE, 2008. "Financial constraints in China : firm-level evidence," Discussion Papers (ECON - Département des Sciences Economiques) 2008048, Université catholique de Louvain, Département des Sciences Economiques.
  3. Lin, Huidan, 2011. "Foreign bank entry and firms' access to bank credit: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 1000-1010, April.
  4. Escobar Gamboa, Octavio Romano, 2009. "IDE entrants, exportations et productivité manufacturière : les différentes performances des régions mexicaines," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/3850 edited by Guillochon, Bernard, November.
  5. repec:hal:cesptp:hal-00633901 is not listed on IDEAS
  6. William Greene, 2007. "Fixed and Random Effects Models for Count Data," Working Papers 07-16, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. Héricourt, Jérôme & Poncet, Sandra, 2009. "FDI and credit constraints: Firm-level evidence from China," Economic Systems, Elsevier, vol. 33(1), pages 1-21, March.
  8. repec:hal:cesptp:hal-00633806 is not listed on IDEAS
  9. Guariglia, Alessandra & Poncet, Sandra, 2008. "Could financial distortions be no impediment to economic growth after all? Evidence from China," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 633-657, December.

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