The Mechanism Analysis Of FDI Impact Of Institutional Change

In recent years, a feature of Chinese economic development is the performance of large inflows of foreign capital. Foreign investment has an important impact on our existing institutional system, which has become a matter of concern for scholars. Over30years of reform and opening up, China has made remarkable achievements in attracting foreign direct investment, and Chinese economy is in the process of transitional road to the international open world for smooth progress. Especially after Chinese accession to the WTO, Chinese foreign direct investment and institutional transformation entered into a new period of rapid development. Foreign direct investment is not only in the number of significantly enhance, but also the role and status of foreign investment has gradually been re-positioning.Earlier, many scholars used a lot of empirical and theoretical analysis to research the nature and effects of FDI. These studies will involve the role of FDI on technological progress of a country, and rarely involved the impact of FDI on a country’s institutional change. Even somewhat involved, they little referenced to the impact of FDI on Chinese which is a suction-owned large country in the economic transformation during the process of institutional change. For a transition country, the foreign-funded enterprises and domestic enterprises have a big difference in terms of institutional change process. The introduction of foreign investment means an introduction of a new subject, a new enterprise system and a new concept of operations and a new allocation of resources. FDI as a new institutional arrangement to enter our country, itself, is a kind of institutional innovation, and FDI plays the role of the private economy in the process of institutional change in China. While FDI this arrangement will inevitably lead to changes in the allocation of resources of the community as a whole with the social local system. FDI considered as the "composite products" including technology, systems, management experience, advanced concepts and capital has many effects which not only in the technical level but also in the institutional level on the host country. The influx of FDI will become a special road for our country towards a market-oriented economic institution transition, and FDI with its special nature and characteristics promotes and impacts Chinese institutional change.The paper aims to resolve the long-standing controversy on FDI:Whether FDI will affect Chinese institutional change. If so, then the FDI plays what role in Chinese economic transformation process, and through what mechanisms to impact institutional change. How trends and characteristics of FDI affects institutional change process in our country. How we should deal with problems and phenomena of FDI entering the country, and how to choose the future foreign policy.This paper used a combined method of theoretical research and empirical analysis, qualitative and quantitative analysis, process analysis and status quo analysis. Initially the related theory of FDI promoting a country’s institutional change has been analyzed. FDI impacts the institutional change through transmission mechanism of market institution, legal institution, non-state-owned economic institution, financial institution and government institution. According to the mechanism of action of various factors, this paper divided the transmission mechanism into two main effects which were direct effect and indirect effect. Market institution, non-state-owned economic institution and financial institution belong to the direct effect, while legal institution and government institution belong to the indirect effect. After analyzing the transmission mechanism of its empirical test, this paper used a pulse response simulation of the impact of FDI on various institutional factors, and analyzed the impact delay period and its reasons. This paper used SLM of spatial econometrics to estimate the institutional indicators of different provinces, and gave distance factors space weights, which made the measurement system more accurate. Using this method, we can measure the regional spillover effects of FDI into surrounding area. So we found out that FDI generates spillover effects which has spatial feature during institutional process, meanwhile the spatial feature has regional characteristics.Few previous papers have researched FDI spillovers through spatial angle, but the spatial spillover effect can not be ignored. The modern spatial economic theory believes that when transportation costs are high, between the various regions, it will forming a higher trade barrier and maintains self-sufficiency balanced. The essentially of FDI spillover effect is institutional externality, and the institutional spillover path follows the demonstration effect, competition effect, four mechanisms of contact effect and human capital flow effects. Therefore, the effectiveness of institutional spillover path will decreases with increasing geographical distance or spill cost. This means that the neighbor areas are more likely to have institutional spillover effects than the far area during multinational companies to promote the host country institutional change process. It is not difficult to find out that Chinese inter-regional economic activity has a geographical characteristic, and adjacent areas are more likely to imitate multinational management institution and operational mechanism in order to improve its production efficiency through "demonstration effect", which results in inter-industry spatial spillover effects. For the quick and efficient logistics costs consideration, multinational companies usually select the surrounding enterprise as upstream suppliers and provide training, information and help, which results in inter-industry spatial spillover effects. If multinational’s employee turnover, they usually choose the adjacent domestic enterprises to work in order to take advantage of their skills which gained from former multinational company, which results in employee turnover spatial spillover effect. So adding a spatial spillover effect study makes the results more realistic. Putting the spillover effect under regional perspective makes the research more specific. The space angle analysis method can clearly understand that FDI impacts the institution of Chinese provinces inter-domain changes, which has practical significance and research value. This paper through layer-by-layer progressive and logical method reached a conclusion and appropriate policy recommendations for the future FDI development. Ideas with the framework of this study are as follows:The first chapter is an introduction. The relevant literatures on FDI impact of institutional change are discussed and the paper’s main research contents are outlined.The second chapter is a theory review for FDI to promote institutional change. The Related theories of institution, institutional Change, FDI and FDI promoting institutional change have been discussed. The role played by FDI in Chinese transitional process have also been discussed, which induce to institutional change affect mechanism affected by FDI. Also the spillover effect theory and spatial economic theory have been presented and descript.The third chapter is an analysis of institutional change conduction mechanism during FDI promoting process. The paper divided institutional change conduction mechanism into direct effect and indirect effect, and the direct effect includes market institution, non-state-owned economic institution and financial institution, however, the indirect effect includes legal institution and government institution. The paper detailed exposition for each institutional factors conduction mechanism, and eventually came to the overall institutional change conduction mechanism influenced by FDI.The fourth chapter is an empirical analysis of institutional change conduction mechanism during FDI promoting process. The paper verified direct effect and indirect effect through granger test, and verified a specific impact of FDI of each system variable impact trend graph by the impulse response function, and draw the appropriate lag. Finally, the ultimate example of the previous theory discourse the overall practice of argumentation.The fifth chapter is an analysis of the spillover effect during FDI promoting the institutional change process in China. During the process, it comes to the spillover effect at the micro level. Through latest institutional data analysis, the FDI spillover effect and spillover level have been demonstrated. Thereafter, according to the analysis of the spillover effects of FDI regime characteristics presented in our further discourse and interpretation, the spatial spillovers problem have been discussed.The sixth chapter is relevant policy recommendations. The paper gave appropriate policy recommendations on how to promote further process of FDI promoting institutional change in China, and on how to enhance FDI regime spillover effect, and on how to solve the problem of special disequilibrium in order to give our country future foreign policy choices.