Foreign direct investment under weak rule of law : theory and evidence from China
AbstractThis 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.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 5790.
Date of creation: 01 Sep 2011
Date of revision:
Debt Markets; Emerging Markets; Investment and Investment Climate; Bankruptcy and Resolution of Financial Distress; Access to Finance;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-16 (All new papers)
- NEP-DEV-2011-09-16 (Development)
- NEP-IFN-2011-09-16 (International Finance)
- NEP-TRA-2011-09-16 (Transition Economics)
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