How does financial system efficiency affect the growth impact of FDI in China?: Evidence from provincial data 1999-2006
Purpose–In spite of being the second largest recipient of foreign direct investment (FDI) in the world, China shows limited evidence of considerable FDI benefits on growth (Fan and Hu; Luo; Ran et al.). Motivated by Alfaro et al.'s model, the purpose of this study is to test whether poor financial market development might be responsible for the relatively low benefits of FDI on growth in China. Design/methodology/approach–The author applies Blundell-Bond system GMM estimators to a panel of Chinese provinces. Findings–The results indicate that poor financial intermediation does indeed limit the transmission of FDI benefits within the Chinese economy. Moreover, the study reveals preliminary evidence that banks' credits to unproductive state-owned enterprises (SOEs) constitute poor financial intermediation with negative growth implications. In contrast, credits to small private enterprises are associated with a positive impact of FDI on growth. Research limitations/implications–The study is constrained by data availability especially for private credit data across provinces. Practical implications–Two policy implications can be drawn from the empirical findings. First, the direct policy implication is that to ensure positive benefits from FDI in China, domestic financial reforms are crucial. This is an important perspective for making FDI policies. The results also reveal some key priorities of financial reforms. More credits to small private enterprises are an indication of good financial intermediation, while more loans extended to unproductive SOEs signal poor financial intermediation. The priority of reform comes down to tackling the difficult problem of credit misallocation. Originality/value–This paper provides an alternative perspective to address the weak FDI-growth relationship found in China. Inspired by Alfaro et al.'s model and the understanding of the problem of Chinese financial markets, the study examines the role of the financial system in the FDI-growth linkage and reveals how financial market conditions could influence FDI benefits in China.
Volume (Year): 2 (2012)
Issue (Month): 2 (August)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=cfri Email:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boyreau-Debray, Genevieve, 2003. "Financial intermediation and growth - Chinese style," Policy Research Working Paper Series 3027, The World Bank.
- Xiaoqiang Cheng & Hans Degryse, 2010.
"The Impact of Bank and Non-Bank Financial Institutions on Local Economic Growth in China,"
Journal of Financial Services Research,
Springer;Western Finance Association, vol. 37(2), pages 179-199, June.
- Xiaoqiang Cheng & Hans Degryse, 2006. "The Impact of Bank and Non-Bank Financial Institutions on Local Economic Growth in China," LICOS Discussion Papers 17106, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
- Cheng, X. & Degryse, H.A., 2006. "The Impact of Bank and Non-Bank Financial Institutions on Local Economic Growth in China," Discussion Paper 2006-82, Tilburg University, Center for Economic Research.
- Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000.
"Financial intermediation and growth: Causality and causes,"
Journal of Monetary Economics,
Elsevier, vol. 46(1), pages 31-77, August.
- Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
- Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
- Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
- Sebnem Kalemli-Ozcan & Laura Alfaro & Selin Sayek & Areendam Chanda, 2002.
"FDI and Economic Growth: The Role of Local Financial Markets,"
- Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
- Blundell, Richard & Bond, Stephen, 1998.
"Initial conditions and moment restrictions in dynamic panel data models,"
Journal of Econometrics,
Elsevier, vol. 87(1), pages 115-143, August.
- Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
- Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
- R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
- Robert G. King & Ross Levine, 1993.
"Finance and Growth: Schumpeter Might Be Right,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 108(3), pages 717-737.
- Blomström, Magnus & Kokko, Ari, 1996.
"Multinational Corporations and Spillovers,"
CEPR Discussion Papers
1365, C.E.P.R. Discussion Papers.
- Blomström, Magnus & Kokko, Ari, 1996. "Multinational Corporations and Spillovers," SSE/EFI Working Paper Series in Economics and Finance 99, Stockholm School of Economics.
- Ran, Jimmy & Voon, Jan P. & Li, Guangzhong, 2007. "How does FDI affect China? Evidence from industries and provinces," Journal of Comparative Economics, Elsevier, vol. 35(4), pages 774-799, December.
- N. Gregory Mankiw & David Romer & David N. Weil, 1992.
"A Contribution to the Empirics of Economic Growth,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 107(2), pages 407-437.
- Sylviane GUILLAUMONT JEANNENEY & PING HUA & ZHICHENG LIANG, 2006.
"Financial Development, Economic Efficiency, And Productivity Growth: Evidence From China,"
The Developing Economies,
Institute of Developing Economies, vol. 44(1), pages 27-52.
- Sylviane Guillaumont Jeanneney & Ping Hua & Zhicheng Liang, 2011. "Financial Development, Economic Efficiency and Productivity Growth: Evidence from China," Working Papers halshs-00562630, HAL.
- Zhicheng LIANG & Ping HUA & Sylviane GUILLAUMONT JEANNENEY, 2006. "Financial Development, Economic Efficiency and Productivity Growth: Evidence from China," Working Papers 200625, CERDI.
- Park, Albert & Sehrt, Kaja, 2001.
"Tests of Financial Intermediation and Banking Reform in China,"
Journal of Comparative Economics,
Elsevier, vol. 29(4), pages 608-644, December.
- Albert Park and Kaja Sehrt & Albert Park and Kaja Sehrt, 1999. "Tests of Financial Intermediation and Banking Reform in China," William Davidson Institute Working Papers Series 270, William Davidson Institute at the University of Michigan.
- Manuel Arellano & Stephen Bond, 1991.
"Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,"
Review of Economic Studies,
Oxford University Press, vol. 58(2), pages 277-297.
- Tom Doan, . "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Selin Sayek & Laura Alfaro & Areendam Chanda & Sebnem Kalemli-Ozcan, 2003. "FDI Spillovers, Financial Markets, and Economic Development," IMF Working Papers 03/186, International Monetary Fund.
- Bayoumi, Tamim & Lipworth, Gabrielle, 1998.
"Japanese foreign direct investment and regional trade,"
Journal of Asian Economics,
Elsevier, vol. 9(4), pages 581-607.
- Gabrielle Lipworth & Tamim Bayoumi, 1997. "Japanese Foreign Direct Investment and Regional Trade," IMF Working Papers 97/103, International Monetary Fund.
- Fan, C. Simon & Hu, Yifan, 2007. "Foreign direct investment and indigenous technological efforts: Evidence from China," Economics Letters, Elsevier, vol. 96(2), pages 253-258, August.
- Bond, Stephen Roy & Hoeffler, Anke & Temple, Jonathan, 2001.
"GMM Estimation of Empirical Growth Models,"
CEPR Discussion Papers
3048, C.E.P.R. Discussion Papers.
- James Laurenceson & Kam Ki Tang, . "The FDI-Income Growth Nexus: a review of the Chinese experience," EAERG Discussion Paper Series 0905, School of Economics, University of Queensland, Australia.
- Hao, Chen, 2006. "Development of financial intermediation and economic growth: The Chinese experience," China Economic Review, Elsevier, vol. 17(4), pages 347-362.
- Luo, Xubei & Zhu, Nong, 2008. "Rising income inequality in China : a race to the top," Policy Research Working Paper Series 4700, The World Bank.
- Richard Podpiera, 2006. "Progress in Chinaâ€™s Banking Sector Reform; Has Bank Behavior Changed?," IMF Working Papers 06/71, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:eme:cfripp:v:2:y:2012:i:2:p:406-428. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister)
If references are entirely missing, you can add them using this form.