The Effect of Institution Quality on Foreign Direct Investment in China
|School||Nanjing University of Finance and Economics|
|Keywords||Institution Institution Quality FDI U-Shaped Curve|
In the 21th century, globalization is an important trend in world economic development, and as an important aspect of globalization, Foreign Direct Investment (FDI) has become the major force in global economic growth. In the new century, countries all over the world have been speeding up the pace to attract foreign direct investment (FDI). As one of the countries with the largest foreign direct investment, China’s foreign direct investment (FDI) increased rapidly. But, with the rapid growth of the total FDI, FDI distribute extremely uneven in different regions, showing "East West" situation. Eastern region concentrated most of FDI, and the amount of FDI is still increasing. Central region accounted for only about 10% of the national total FDI, and developed not fast. FDI in the western region is Minimum. With the reform and opening up, the amount of FDI developed very slowly. This article attempts to explain the geographical distribution of FDI in China in the view of institution quality, and clear the relationships between the institution quality and FDI location choice. After understanding of the relationships, we could give some advises to local government on how to improve institution quality level to attract more foreign direct investment. This paper combines theoretical and empirical analysis methods to study the relationship between institution quality and FDI location choice. First, according to the purpose and significance of this research, we summarize and analyze the uneven geographical distribution of China’s FDI, raise structural framework and the main research method, summed up innovation of this study. Second, reviewing the theory of FDI, FDI location choice theory and related institution theory, we get the theoretical foundation of the relationship between institution quality and FDI location choice in China. Third, according to the analysis of institution development and FDI changes, we hypothesize the relationships between institution quality and FDI location choice. Then, verify the hypothesized relationships through empirical study. Finally, make conclusions and recommendations on how to improve institution quality level to attract more FDI.In this paper, with the city-level data, we verify the relationship between institution quality and the location choice of FDI is an opening-up U-curve. Most studies are based on data from countries and provinces, very few studies have used city-level data analysis institution quality and FDI location choice relationship. Basically, the conclusion of the institution impact on the distribution of FDI, is that there is a positive linear relationship between them. No one has found that there is a nonlinear quadratic curve between institution quality and FDI location choice.Therefore, the innovation of this paper is the city-level data and U-curve relationship. The conclusions of this study can give some suggestions to local governments on how to improve institution quality to enhance the ability of absorbing FDI. Particularly, according to analysis in this paper, to the cities in different regions, eastern or western, local government could make different strategies to improve local institution level to attract more FDI for development.