Foreign Direct Investment under Weak Rule of Law : Theory and Evidence from China

Foreign Direct Investment under Weak Rule of Law : Theory and Evidence from China

This 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...

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Bibliographic Details
Main Authors: Wang, Xiaozu, Xu, Lixin Colin, Zhu, Tian
Format: Policy Research Working Paper
Language:English
Published: 2012
Subjects:
ACCESS TO BANK
ACCESS TO BANK LOANS
ACCESS TO CAPITAL
ACCESS TO FINANCE
ACCESS TO LOAN
ACCESS TO LOANS
ACCOUNTING
AFFILIATED ORGANIZATIONS
AGRICULTURAL PRODUCTS
BIASES
BUSINESS ENVIRONMENT
CAPITAL FLOW
CAPITAL FLOWS
COMMERCIAL DISPUTE
COMMERCIAL DISPUTES
CONTRACT ENFORCEMENT
CONTRACTUAL RIGHTS
CORPORATE GOVERNANCE
CORRUPTION
DEPENDENT
DEVELOPING COUNTRIES
DEVELOPING ECONOMIES
DIMINISHING RETURNS
DOMESTIC CAPITAL
DUMMY VARIABLE
ECONOMIC ACTIVITY
ECONOMIC DEVELOPMENT
ECONOMIC GROWTH
ECONOMIC PERFORMANCE
EMPLOYEE
ENVIRONMENTAL PROTECTION
EQUIPMENT
EXPENDITURE
EXPENDITURES
FINANCIAL DEVELOPMENT
FINANCIAL INSTITUTIONS
FINANCIAL INTERMEDIATION
FINANCIAL MARKET
FINANCIAL STATEMENTS
FOREIGN CAPITAL
FOREIGN DIRECT INVESTMENT
FOREIGN EQUITY
FOREIGN FIRM
FOREIGN FIRMS
FOREIGN INVESTMENT
FOREIGN INVESTOR
FOREIGN INVESTORS
FOREIGN OWNERSHIP
FOREIGN SHARE
GLOBAL CAPITAL
GLOBAL CAPITAL FLOWS
GOVERNMENT POLICIES
GROWTH RATE
GROWTH RATES
HOST GOVERNMENT
IMPLICIT CONTRACT
IMPLICIT CONTRACTS
INCOME
INCOME LEVEL
INEQUALITIES
INSTITUTIONAL CONSTRAINTS
INSTITUTIONAL ENVIRONMENT
INTERNATIONAL BANK
INTERNATIONAL BUSINESS
INTERNATIONAL ECONOMICS
INTERNATIONAL INVESTORS
INVESTMENT CLIMATE
INVESTMENT RETURN
LABOR FORCE
LACK OF PROPERTY
LEGAL ENVIRONMENT
LEGAL PROTECTION
LEGAL SYSTEM
LOCAL FINANCIAL MARKET
LOCAL GOVERNMENT
LOCAL GOVERNMENTS
LOCAL MARKET
MANUFACTURING INDUSTRIES
MARKET INTEGRATION
MARKET SIZE
MATURITY
OUTPUT
POLITICAL ECONOMY
POLITICAL POWER
PRIVATE INVESTORS
PRIVATE SECTOR DEVELOPMENT
PROPERTY RIGHTS
PROPERTY RIGHTS PROTECTION
RATE OF RETURN
REPUTATION
REPUTATIONS
RETURN
RETURN ON INVESTMENT
RETURNS
RULE OF LAW
SALES REVENUE
SHARE OWNERSHIP
TAX
TAX BURDEN
TAX BURDENS
TAX CONCESSIONS
TAX POLICIES
TAX RATE
TAX RATES
TAX RETURN
TAX REVENUE
TRACK RECORD
TRANSACTION
TRANSACTION COSTS
TURNOVER
VOLATILITY
WORLD ECONOMY
Online Access:http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110906104511
http://hdl.handle.net/10986/3553
Description
Summary:This 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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