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Frontiers of Economics in China

Front Econ Chin    2013, Vol. 8 Issue (2) : 165-185     DOI: 10.3868/s060-002-013-0008-2
research-article |
Financial Development, Foreign Direct Investment, and the Efficiency of Capital Allocation in China
Kevin X. D. Huang1(), Chun Jiang2, Qingyuan Li,3, Kai Sheng4, Jia Wang5, Qiwei Zhao6
1. Department of Economics, Vanderbilt University, Nashville, TN 37235-1819, USA; 2. School of Economics and Management, Wuhan University, Wuhan 430072, China Jia Wang; 3. School of Economics and Management, Wuhan University, Wuhan 430072, China Jia Wang; 4. School of Mathematical Sciences, Peking University, Beijing 100871, China; 5. World Financial Group, 3300 Holcomb Bridge Road, Norcross, GA 30092-5405, USA; 6. School of Economics and Management, Wuhan University, Wuhan 430072, China
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Abstract

We study the roles of local financial development and foreign direct investment, and more importantly, their interaction with one another, in local capital allocation, based on Chinese industrial and regional data. Our main finding is that, although local financial development and FDI each individually tended to improve the efficiency of local capital allocation during the sample period, they tended to compete and crowd out each other’s effect, so that one impaired the individual function of the other. In particular, there exists a threshold value for local financial development, above which an increase in FDI reduces the efficiency of local capital allocation, rather than improve it. On the other hand, there exists a threshold value for FDI, above which further development in the local financial system lowers the efficiency of local capital allocation, rather than increase it. Our estimations suggest that the levels of FDI and local financial development in some relatively more developed Chinese regions have already surpassed such threshold values. We provide some interpretations of our findings and we discuss potential policy implications.

Keywords foreign direct investment (FDI)      local financial development      capital allocation efficiency     
Corresponding Authors: Kevin X. D. Huang,Email:kevin.huang@vanderbilt.edu   
Issue Date: 05 June 2013
 Cite this article:   
Kevin X. D. Huang,Chun Jiang,Qingyuan Li,, et al. Financial Development, Foreign Direct Investment, and the Efficiency of Capital Allocation in China[J]. Front Econ Chin, 2013, 8(2): 165-185.
 URL:  
http://journal.hep.com.cn/fec/EN/10.3868/s060-002-013-0008-2
http://journal.hep.com.cn/fec/EN/Y2013/V8/I2/165
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Qingyuan Li,
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Qiwei Zhao
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