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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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

id	okr-10986-3553
recordtype	oai_dc
spelling	okr-10986-35532021-04-23T14:02:10Z Foreign Direct Investment under Weak Rule of Law : Theory and Evidence from China Wang, Xiaozu Xu, Lixin Colin Zhu, Tian 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 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. 2012-03-19T18:04:31Z 2012-03-19T18:04:31Z 2011-09-01 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 English Policy Research working paper ; no. WPS 5790 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research :: Policy Research Working Paper East Asia and Pacific East Asia and Pacific East Asia Asia China
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	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
spellingShingle	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 Wang, Xiaozu Xu, Lixin Colin Zhu, Tian Foreign Direct Investment under Weak Rule of Law : Theory and Evidence from China
geographic_facet	East Asia and Pacific East Asia and Pacific East Asia Asia China
relation	Policy Research working paper ; no. WPS 5790
description	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.
format	Publications & Research :: Policy Research Working Paper
author	Wang, Xiaozu Xu, Lixin Colin Zhu, Tian
author_facet	Wang, Xiaozu Xu, Lixin Colin Zhu, Tian
author_sort	Wang, Xiaozu
title	Foreign Direct Investment under Weak Rule of Law : Theory and Evidence from China
title_short	Foreign Direct Investment under Weak Rule of Law : Theory and Evidence from China
title_full	Foreign Direct Investment under Weak Rule of Law : Theory and Evidence from China
title_fullStr	Foreign Direct Investment under Weak Rule of Law : Theory and Evidence from China
title_full_unstemmed	Foreign Direct Investment under Weak Rule of Law : Theory and Evidence from China
title_sort	foreign direct investment under weak rule of law : theory and evidence from china
publishDate	2012
url	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
_version_	1764387191082975232

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

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