Kevin X. D. Huang, Chun Jiang, Qingyuan Li, Kai Sheng, Jia Wang, Qiwei Zhao
Author information
a Department of Economics, Vanderbilt University, Nashville, TN 37235-1819, USA
b School of Economics and Management, Wuhan University, Wuhan 430072, China Jia Wang
c School of Economics and Management, Wuhan University, Wuhan 430072, China Jia Wang
d School of Mathematical Sciences, Peking University, Beijing 100871, China
e World Financial Group, 3300 Holcomb Bridge Road, Norcross, GA 30092-5405, USA
f School of Economics and Management, Wuhan University, Wuhan 430072, China
E-mail: kevin.huang@vanderbilt.edu(Kevin X. D. Huang)
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.
foreign direct investment (FDI) , local financial development , capital allocation efficiency
Kevin X. D. Huang, Chun Jiang, Qingyuan Li,, Kai Sheng, Jia Wang, Qiwei Zhao. Financial Development, Foreign Direct Investment, and the Efficiency of Capital Allocation in China. Front Econ Chin, 2013, 8(2): 165‒185 https://doi.org/10.3868/s060-002-013-0008-2
