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Financial development and FDI inflows in China

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  • Khan, Hameed
  • Khan, Umair

Abstract

In this paper, the authors revisit the nexus of financial development and FDI inflows in Chinese perspective, incorporating the vital role of institutional quality and other important variables in this paradigm. Using ARDL bound testing and VECM procedures, they establish causality by exploiting variations in financial development and FDI. To unmask the shortcomings in the previous literature, the authors use a composite index of financial development, recently developed by the IMF, since it provides a more fine-grained analysis. The results show that there is a long-run relationship between FDI and financial development. Bidirectional causality is confirmed by using VECM. The inclusion of control variables, e.g., institutional quality, transport infrastructure, per capita GDP, trade openness, domestic investment, natural resources rent, is robust in the analysis. The positive role of financial development in FDI inflows is of utmost importance for policymakers and the Chinese government. Several policy implications are given in this study.

Suggested Citation

  • Khan, Hameed & Khan, Umair, 2019. "Financial development and FDI inflows in China," Economics Discussion Papers 2019-54, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201954
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    Cited by:

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    2. Kamalova Mariyakhan & Elyas Abdulahi Mohamued & Muhammad Asif Khan & József Popp & Judit Oláh, 2020. "Does the Level of Absorptive Capacity Matter for Carbon Intensity? Evidence from the USA and China," Energies, MDPI, vol. 13(2), pages 1-18, January.
    3. Mollah Aminul Islam & Muhammad Asif Khan & József Popp & Wlodzimierz Sroka & Judit Oláh, 2020. "Financial Development and Foreign Direct Investment—The Moderating Role of Quality Institutions," Sustainability, MDPI, vol. 12(9), pages 1-22, April.
    4. Mohammad Anamul Haque & Zhang Biqiong & Muhammad Usman Arshad, 2022. "Sources of Financial Development and Their Impact on FDI Inflow: A Panel Data Analysis of Middle-Income Economies," Economies, MDPI, vol. 10(8), pages 1-18, July.
    5. Chunling Li & Khansa Pervaiz & Muhammad Asif Khan & Muhammad Atif Khan & Judit Oláh, 2022. "Impact of Sovereign Credit Rating Disclosure on Chinese Financial Market," SAGE Open, , vol. 12(1), pages 21582440221, March.
    6. Faisal Mehmood & Muhammad Atique & Wang Bing & Hameed Khan & Henna Henna, 2021. "Infrastructure and sectoral FDI in China: an empirical analysis," Post-Print hal-03583884, HAL.

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    More about this item

    Keywords

    financial development; FDI; ARDL; liberalization; capital market; money market;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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