Judicial independence and foreign direct investment: Evidence from China

As a core dimension of institutional quality, judicial independence plays a critical role in attracting foreign direct investment (FDI). To minimize local interference in judicial proceedings, China has enacted the ‘Universal Management of Local Courts Below Province’ reform, which centralizes the administration of staffing, financial security for local courts and procuratorates below the provincial level. In this study, we use a firm-level difference-in-differences (DID) model to analyze the impact of the ‘Universal Management of Local Courts Below Province’ on FDI. Specifically, we consider the implementation of this policy pilot as an exogenous shock and study its impact on FDI. Our findings indicate a significant positive relationship between judicial independence and FDI in a locality. The phenomenon can be ascribed to a decrease in transaction costs, relaxation of financial regulations, and the increased innovation activity of firms. Furthermore, our findings show that the enhancement of judicial independence can mitigate the decline in FDI resulting from heightened compliance expenses of doing business in the face of rising labor costs and more stringent environmental regulations.