Regional financial development and foreign direct investment

Abstract

In this paper, we examine the link between regional financial development and foreign direct investment using a large micro-level dataset of Chinese manufacturing enterprises. We first investigate the effect of regional financial development on foreign direct investment location choices, and find such development to significantly promote foreign direct investment. We then show that regional financial development also plays an important role in foreign direct investment productivity spillovers. Domestic firms located in financially developed regions gain positive knowledge spillovers from foreign direct investment, but the competitive pressure from multinationals exerts a negative influence on the productivity of domestic firms.