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Foreign direct investment under weak rule of law : theory and evidence from China, Volume 1
Author:Wang, Xiaozu; Xu, Lixin Colin; Zhu, Tian; Country:China;
Date Stored:2011/09/06Document Date:2011/09/01
Document Type:Policy Research Working PaperSubTopics:Debt Markets; Emerging Markets; Investment and Investment Climate; Bankruptcy and Resolution of Financial Distress; Access to Finance
Language:EnglishRegion:East Asia and Pacific
Report Number:WPS5790Collection Title:Policy Research working paper ; no. WPS 5790
Volume No:1  

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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