Institutions and Foreign Direct Investment: China Versus the Rest of the World
(September 2007)Abstract
Weak institutions ought to deter foreign direction investment (FDI),
and mass media stories highlight China's institutional deficiencies,
yet China is now one of the world's largest FDI destinations. This
incongruity characterizes China's paradoxical growth. Cross-country
regressions show that China's FDI inflow is not exceptionally large,
given the quality of its institutions and its economic track record.
Institutions clearly determine a country's allure as an FDI destination,
but standard measures of institutional quality can be problematic
for countries undergoing rapid institutional development, and can
usefully be augmented by economic track record measures. Deng Xiaoping's
1993 southern tour heralded sweeping reforms, and this regime shift
is insufficiently reflected in commonly used measures of institutional
quality. China's FDI inflow surge after these reforms resembles similar
post-regime shift surges in the East Bloc, and so is also unexceptional.
Recent arguments that China's FDI inflow is inefficiently large because
weak institutions deter domestic investment while special initiatives
attract FDI are thus either unsupported or not unique to China.