Departmental Bulletin Paper Impact of Financial Development and Foreign Direct Investment on Investment Allocation Efficiency in China : An Evidence Based the Industrial Panel Data

Zhao, Guoqing  ,  Wen, Tao  ,  Ma, Jun

62 ( 1 )  , pp.11 - 46 , 2016-07 , 富山大学経済学部
Using China’s provincial panel data set containing 17 industries from 2006 to 2012, we assess the effect of financial development and foreign direct investment (FDI) on the allocation of China’s industrial investment, based on two investment allocation efficiency indicators, the industrial sales elasticity of total fixed assets and the industrial value added elasticity of total fixed assets, respectively. When using the sales elasticity of total fixed assets to indicate investment allocation efficieng, we find that FDI and stock market activities had negative effects while investment allocation efficiency was spurred by domestic bank loan whose impact was largely reduced by FDI, and loan to the private sector had a mild influence on investment allocation efficiency. Contradictory results are obtained by using industrial value added elasticity of total fixed assets as the indicator of the investment allocation efficiency, which could be attributed to the fact that China's FDI was below the minimum threshold value to fully promote the optimization of domestic bank loan but reached that for loans to the private sector. Furthermore, stock market has a positive effect on investment allocation efficiency and barely any crowding out effect on FDI. Therefore, policy-makers should carefully consider the economic condition, the development plan and location when choosing the optimal investment scheme, and gradually switch the sales-driven investment strategy to that aiming at increasing industrial value-added.

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