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Fiscal decentralization, endogenous policies, and foreign direct investment: Theory and evidence from China and India

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  • Wang, Yong

Abstract

A political-economy model is developed to explain why fiscal decentralization may have a non-monotonic effect on FDI inflows through endogenous policies. Too much fiscal decentralization hurts central government incentives, whereas too little fiscal decentralization renders the local governments vulnerable to capture by the protectionist special interest groups. Moreover, the local government's preference for FDI can be endogenously polarized; therefore, a small change in fiscal decentralization across certain threshold values may lead to a dramatic difference in equilibrium FDI inflows. Empirical investigations support the idea that the difference in fiscal decentralization is an important reason for the nine-fold difference in FDI per capita between China and India. Cross-country regression results also support the inverted-U relationship.

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  • Wang, Yong, 2013. "Fiscal decentralization, endogenous policies, and foreign direct investment: Theory and evidence from China and India," Journal of Development Economics, Elsevier, vol. 103(C), pages 107-123.
    • Handle: RePEc:eee:deveco:v:103:y:2013:i:c:p:107-123
    DOI: 10.1016/j.jdeveco.2013.01.006
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    2. Xi Li & Xuewen Liu & Yong Wang, 2015. "A Model of China's State Capitalism," HKUST IEMS Working Paper Series 2015-12, HKUST Institute for Emerging Market Studies, revised Feb 2015.
    3. Wang, Li & Menkhoff, Lukas & Schröder, Michael & Xu, Xian, 2019. "Politicians’ promotion incentives and bank risk exposure in China," Journal of Banking & Finance, Elsevier, vol. 99(C), pages 63-94.
    4. Reddy, Kotapati Srinivasa, 2015. "Revisiting and Reinforcing the Farmers Fox Theory: A Study (Test) of Three Cases in Cross-border Inbound Acquisitions," MPRA Paper 63561, University Library of Munich, Germany, revised 2015.
    5. Wang, Yong, 2015. "A model of sequential reforms and economic convergence: The case of China," China Economic Review, Elsevier, vol. 32(C), pages 1-26.
    6. Li Wang & Lukas Menkhoff & Michael Schröder & Xian Xu, 2018. "Politicians' Promotion Incentives and Bank Risk Exposure," Discussion Papers of DIW Berlin 1771, DIW Berlin, German Institute for Economic Research.
    7. Xiaodan Gao & Yinhui Wang, 2023. "From Investment to the Environment: Exploring the Relationship between the Coordinated Development of Two-Way FDI and Carbon Productivity under Fiscal Decentralization," Sustainability, MDPI, vol. 16(1), pages 1-20, December.
    8. Bayari, Celal, 2020. "The Neoliberal Globalization Link to the Belt and Road Initiative: The State and State-Owned-Enterprises in China [alternative title: Bilateral and Multilateral Dualities of the Chinese State in the C," MPRA Paper 104471, University Library of Munich, Germany, revised 21 Jul 2020.
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    10. Reddy, Kotapati Srinivasa, 2015. "Determinants of Cross-border Mergers and Acquisitions: A Comprehensive Review and Future Direction," MPRA Paper 63969, University Library of Munich, Germany, revised 2015.
    11. Xie, En & Reddy, K.S. & Liang, Jie, 2017. "Country-specific determinants of cross-border mergers and acquisitions: A comprehensive review and future research directions," Journal of World Business, Elsevier, vol. 52(2), pages 127-183.
    12. Farzan Yahya & Muhammad Rafiq, 2020. "Brownfield, greenfield, and renewable energy consumption: Moderating role of effective governance," Energy & Environment, , vol. 31(3), pages 405-423, May.
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    14. Zhuoxi Yu & Yu Wu & Zhichuan Zhu, 2023. "Fiscal Decentralization, Environmental Regulation and High-Quality Economic Development," Sustainability, MDPI, vol. 15(10), pages 1-20, May.

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    More about this item

    Keywords

    Fiscal decentralization; FDI; Sequential lobby; Technology adoption; Growth and development; China and India;
    All these keywords.

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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