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Institutions and Foreign Investment: China versus the World

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Author Info
Joseph P.H. Fan
Randall Morck
Lixin Colin Xu
Bernard Yeung

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13435.

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Date of creation: Sep 2007
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Handle: RePEc:nbr:nberwo:13435

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
O43 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
O53 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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