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Foreign direct investment under weak rule of law : theory and evidence from China
 
Author:Wang, Xiaozu; Xu, Lixin Colin; Zhu, Tian; Collection Title:Policy Research working paper ; no. WPS 5790
Country:China; Date Stored:2011/09/06
Document Date:2011/09/01Document Type:Policy Research Working Paper
SubTopics:Bankruptcy and Resolution of Financial Distress; Access to Finance; Emerging Markets; Debt Markets; Investment and Investment ClimateLanguage:English
Region:East Asia and PacificReport Number:WPS5790
Volume No:1 of 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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