Institutions and Foreign Direct Investment: China versus the Rest of the World

SummaryWeak institutions impede foreign direction investment (FDI), yet China attracts massive FDI despite global media spotlighting its institutional infirmities. Standard institutional quality variables poorly track rapid transformations, like China’ regime shift following Den Xiaoping’s 1993 Southern Tour. Economy track record usefully augments these variables in such cases. Cross-country regressions controlling for institutional quality and economy track record reveal China’s FDI inflow unexceptional. Rather, China’s FDI inundation resembles analogous post-reform East Bloc events. Arguments that China’s FDI inflow is inefficiently large because weak institutions deter domestic investment while special initiatives attract FDI are thus either unsupported or not unique to China.