IDEAS home Printed from https://ideas.repec.org/p/csg/ajrcau/383.html
   My bibliography  Save this paper

How does financial system efficiency affect the growth impact of FDI in China?

Author

Listed:
  • Ying Xu

Abstract

In spite of being the second largest recipient of FDI in the world, China shows limited evidence of considerable FDI benefits on growth (Fan and Hu 2007; Luo 2007; Ran et al. 2007). Motivated by Alfaro et al.’s (2003) model, this study tests whether poor financial market development might be responsible for the relatively low benefits of FDI on growth in China. We apply Blundell–Bond system GMM estimators to a panel of Chinese provinces. Our results indicate that poor financial intermediation does indeed limit the transmission of FDI benefits within the Chinese economy. Moreover, the study reveals preliminary evidence that banks’ credits to unproductive State Owned Enterprises (SOEs) constitute poor financial intermediation with negative growth implications. In contrast, credits to small private enterprises are associated with a positive impact of FDI on growth.

Suggested Citation

  • Ying Xu, 2009. "How does financial system efficiency affect the growth impact of FDI in China?," Asia Pacific Economic Papers 383, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:csg:ajrcau:383
    as

    Download full text from publisher

    File URL: https://crawford.anu.edu.au/pdf/pep/apep-383.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Richard Podpiera, 2006. "Progress in China’s Banking Sector Reform: Has Bank Behavior Changed?," IMF Working Papers 2006/071, International Monetary Fund.
    2. Stephen Bond & Anke Hoeffler & Jonathan Temple, 2001. "GMM Estimation of Empirical Growth Models," Economics Papers 2001-W21, Economics Group, Nuffield College, University of Oxford.
    3. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 717-737.
    4. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    5. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084, Central Bank of Chile.
    6. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    7. repec:cto:journl:v:21:y:2001:i:1:p:19-41 is not listed on IDEAS
    8. Park, Albert & Sehrt, Kaja, 2001. "Tests of Financial Intermediation and Banking Reform in China," Journal of Comparative Economics, Elsevier, vol. 29(4), pages 608-644, December.
    9. Bayoumi, Tamim & Lipworth, Gabrielle, 1998. "Japanese foreign direct investment and regional trade," Journal of Asian Economics, Elsevier, vol. 9(4), pages 581-607.
    10. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 407-437.
    11. Ding Lu & Shandre Thangavelu & Qing Hu, 2005. "Biased Lending and Non-performing Loans in China's Banking Sector," Journal of Development Studies, Taylor & Francis Journals, vol. 41(6), pages 1071-1091.
    12. Fan, C. Simon & Hu, Yifan, 2007. "Foreign direct investment and indigenous technological efforts: Evidence from China," Economics Letters, Elsevier, vol. 96(2), pages 253-258, August.
    13. Selin Sayek & Laura Alfaro & Areendam Chanda & Sebnem Kalemli-Ozcan, 2003. "FDI Spillovers, Financial Markets, and Economic Development," IMF Working Papers 2003/186, International Monetary Fund.
    14. Xiaoqiang Cheng & Hans Degryse, 2010. "The Impact of Bank and Non-Bank Financial Institutions on Local Economic Growth in China," Journal of Financial Services Research, Springer;Western Finance Association, vol. 37(2), pages 179-199, June.
    15. Benhabib, Jess & Spiegel, Mark M, 2000. "The Role of Financial Development in Growth and Investment," Journal of Economic Growth, Springer, vol. 5(4), pages 341-360, December.
    16. David Roodman, 2006. "How to Do xtabond2," North American Stata Users' Group Meetings 2006 8, Stata Users Group.
    17. Stephen Bond & Anke Hoeffler, 2001. "GMM Estimation of Empirical Growth Models," Economics Series Working Papers 2001-W21, University of Oxford, Department of Economics.
    18. Sylviane GUILLAUMONT JEANNENEY & PING HUA & ZHICHENG LIANG, 2006. "Financial Development, Economic Efficiency, And Productivity Growth: Evidence From China," The Developing Economies, Institute of Developing Economies, vol. 44(1), pages 27-52, March.
    19. James Laurenceson & Kam Ki Tang, "undated". "The FDI-Income Growth Nexus: a review of the Chinese experience," EAERG Discussion Paper Series 0905, School of Economics, University of Queensland, Australia.
    20. repec:lic:licosd:17106 is not listed on IDEAS
    21. Guariglia, Alessandra & Poncet, Sandra, 2008. "Could financial distortions be no impediment to economic growth after all? Evidence from China," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 633-657, December.
    22. Hao, Chen, 2006. "Development of financial intermediation and economic growth: The Chinese experience," China Economic Review, Elsevier, vol. 17(4), pages 347-362.
    23. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. "Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-389, September.
    24. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    25. Galina Hale & Cheryl Long, 2011. "Are There Productivity Spillovers From Foreign Direct Investment In China?," Pacific Economic Review, Wiley Blackwell, vol. 16(2), pages 135-153, May.
    26. Ran, Jimmy & Voon, Jan P. & Li, Guangzhong, 2007. "How does FDI affect China? Evidence from industries and provinces," Journal of Comparative Economics, Elsevier, vol. 35(4), pages 774-799, December.
    27. repec:bla:jecsur:v:12:y:1998:i:3:p:247-77 is not listed on IDEAS
    28. Luo, Xubei & Zhu, Nong, 2008. "Rising income inequality in China : a race to the top," Policy Research Working Paper Series 4700, The World Bank.
    29. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ying Xu, 2012. "How does financial system efficiency affect the growth impact of FDI in China?: Evidence from provincial data 1999-2006," China Finance Review International, Emerald Group Publishing, vol. 2(2), pages 406-428, August.
    2. Guariglia, Alessandra & Poncet, Sandra, 2008. "Could financial distortions be no impediment to economic growth after all? Evidence from China," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 633-657, December.
    3. Yongfu Huang, 2011. "Private investment and financial development in a globalized world," Empirical Economics, Springer, vol. 41(1), pages 43-56, August.
    4. Hong Zhuang & Haiyan Yin & Miao Wang & Jiawen Yang, 2019. "Bank Efficiency and Regional Economic Growth: Evidence from China," Annals of Economics and Finance, Society for AEF, vol. 20(2), pages 661-689, November.
    5. Alali, Walid Y., 2010. "Impact of Institutions and Policy on Economic Growth: Empirical Evidence," MPRA Paper 115610, University Library of Munich, Germany.
    6. Qu, Guangjun & Sylwester, Kevin & Wang, Feng, 2016. "Anticorruption and Growth: Evidence from China," MPRA Paper 72190, University Library of Munich, Germany.
    7. Balcilar, Mehmet & Gupta, Rangan & Lee, Chien-Chiang & Olasehinde-Williams, Godwin, 2018. "The synergistic effect of insurance and banking sector activities on economic growth in Africa," Economic Systems, Elsevier, vol. 42(4), pages 637-648.
    8. Bengt Söderlund & Patrik Gustavsson Tingvall, 2017. "Capital Freedom, Financial Development and Provincial Economic Growth in China," The World Economy, Wiley Blackwell, vol. 40(4), pages 764-787, April.
    9. Vu, Khuong M & Asongu, Simplice, 2020. "Backwardness advantage and economic growth in the information age: A cross-country empirical study," Technological Forecasting and Social Change, Elsevier, vol. 159(C).
    10. Guariglia, Alessandra & Liu, Xiaoxuan & Song, Lina, 2011. "Internal finance and growth: Microeconometric evidence on Chinese firms," Journal of Development Economics, Elsevier, vol. 96(1), pages 79-94, September.
    11. Arshad Ali Bhatti & M. Emranul Haque & Denise R. Osborn, 2013. "Is the Growth Effect of Financial Development Conditional on Technological Innovation?," Centre for Growth and Business Cycle Research Discussion Paper Series 188, Economics, The University of Manchester.
    12. Max Kohler & Stefan Sperlich & Jisu Yoon, 2019. "A Varying Coefficient Model for Assessing the Returns to Growth to Account for Poverty and Inequality," Papers 1903.02390, arXiv.org.
    13. Gründler, Klaus, 2015. "The vanishing effect of finance on growth," Discussion Paper Series 133, Julius Maximilian University of Würzburg, Chair of Economic Order and Social Policy.
    14. Isabel Cortes-Jimenez, 2006. "Tourism and Economic Growth At Regional Level: the Cases of Spain and Italy," ERSA conference papers ersa06p61, European Regional Science Association.
    15. Zhang, Jin & Wang, Lanfang & Wang, Susheng, 2012. "Financial development and economic growth: Recent evidence from China," Journal of Comparative Economics, Elsevier, vol. 40(3), pages 393-412.
    16. Papaioannou, Elias, 2007. "Finance and growth: a macroeconomic assessment of the evidence from a European angle," Working Paper Series 787, European Central Bank.
    17. Malebogo Bakwena & Philip Bodman, "undated". "The Role of Financial Development in Natural Resource Abundant Economies: Does the Nature of the Resource Matter?," MRG Discussion Paper Series 2208, School of Economics, University of Queensland, Australia.
    18. Zeeshan Atiq & M. Emranul Haque, 2015. "Financial Development and Economic Growth: The Role of Financial Liberalization," Centre for Growth and Business Cycle Research Discussion Paper Series 201, Economics, The University of Manchester.
    19. Eicher, Theo S. & Schreiber, Till, 2010. "Structural policies and growth: Time series evidence from a natural experiment," Journal of Development Economics, Elsevier, vol. 91(1), pages 169-179, January.
    20. Samargandi, Nahla & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries," World Development, Elsevier, vol. 68(C), pages 66-81.

    More about this item

    JEL classification:

    • N25 - Economic History - - Financial Markets and Institutions - - - Asia including Middle East
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:csg:ajrcau:383. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akira Kinefuchi (email available below). General contact details of provider: https://edirc.repec.org/data/ajrccau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.