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How Does Financial System Efficiency Affect the Growth Impact of FDI in China?


  • Ying Xu

    (Australia-Japan Research Centre)


In spite of being the second largest recipient of FDI in the world, China shows limited evidence of considerable FDI benefits on growth (Fan and Hu 2007; Luo 2007; Ran et al. 2007). Motivated by Alfaro et al.s (2003) model, this study tests whether poor financial market development might be responsible for the relatively low benefits of FDI on growth in China. We apply BlundellBond system GMM estimators to a panel of Chinese provinces. Our 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.

Suggested Citation

  • Ying Xu, 2009. "How Does Financial System Efficiency Affect the Growth Impact of FDI in China?," Development Economics Working Papers 22885, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:develo:22885

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    References listed on IDEAS

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    More about this item


    foreign direct investment; FDI spill-overs; financial development; credit misallocation; economic growth;

    JEL classification:

    • N25 - Economic History - - Financial Markets and Institutions - - - Asia including Middle East
    • 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
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance


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