Digital Financial Inclusion And FDI Inflow

Based on the financial suppression theory,the significiant reason why China needs to introduce foreign capital is the defects of its financial system.First,the imperfection of China’s financial market leads to a large number of savings forced to idle,difficult to transform into effective investment.Second,there are financial distortions in China’s financial market,such as political sequencing financing,regional credit rationing system and interest rate control.A large number of financial resources flow to the state-owned economic sectors,while the non-state-owned economic sectors are difficult to obtain financial support.In order to alleviate the widespread financial exclusion in China’s financial system,the development of inclusive finance system has become an important part of China’s financial reform.The continuous integration of digital technology and financial structures has driven the transformation of inclusive finance in China,and digital inclusive finance has become the mainstream form of inclusive finance.Digital inclusive finance has also become a hot research issue at home and abroad.Relevant studies mainly focus on the role of digital inclusive finance in economic development,poverty alleviation,innovation and entrepreneurship,and consumer consumption,as well as the opportunities and challenges brought by digital finance to traditional finance.However,limited to the perspective of closed economy,few articles can focus on the relationship between digital financial inclusion and international capital flows in open economy,especially FDI flows.Digital inclusive finance not only improves the level of China’s financial development from the width and breadth,but also has a huge impact on the traditional financial system,and then has an impact on the location choice of MNEs for direct investment in China.Two problems exist in the existing research on the relationship between financial development and FDI in host countries.First,relevant literature on financial development and FDI mainly focuses on the relationship between financial depth of host country’s financial development and FDI,and research on the relationship between the width and breadth of financial development in host country and FDI is still insufficient..Second,existing studies have concluded that there is a "positive relationship","negative relationship" and "nonlinear relationship" between the host country’s financial development and FDI inflow,but failed to reach a consistent conclusion.The opposite results of the relationship between financial development and FDI inflow in host countries are mainly due to the fact that different studies are conducted from different perspectives.From the perspective of MNEs,which are FDI suppliers,the developed financial market of the host country is an important factor to attract the direct investment of MNEs.However,from the perspective of the host country,which is a FDI demander,the backwardness of financial development is an important reason for the host country to introduce FDI.Therefore,different conclusions will be drawn from different perspectives of FDI supply side and demand side.Second,different studies have different understandings of financial development.Financial development covers the expansion of financial scale,the improvement of financial efficiency and the optimization of financial structure and other dimensions,and different conclusions are drawn based on different measures of financial development level.Based on the existing research on financial development and FDI inflow,this paper comprehensively considers the relationship between digital inclusive finance and FDI in open economy from both the FDI supply side and the FDI demand side,and puts forward the core question of this research--will the development of digital inclusive finance ultimately promote or inhibit FDI inflow into China? Based on the consideration of this question,this paper carries out research from the following aspects.Firstly,does digital inclusive finance rely on traditional finance to develop?Financial development theory is produced based on the study of traditional financial system.Digital inclusive finance is different from traditional finance in terms of structure principal and structure mode.Can digital inclusive finance still be explained by financial development theory? The clarification of the relationship between digital financial inclusion and traditional finance determines whether this study is a theoretical enrichment of existing research or a new topic completely different from existing research.Using generalized difference-in-difference method,this paper examines the changes of digital financial inclusion level in cities with different levels of traditional financial development by taking advantage of the issuance of relevant documents such as “Notice of Promoting The Development Plan of Inclusive Finance(2016-2020)” and “G20 High-level Principles of Digital Financial Inclusion ” around 2016.The research finds that with the improvement of policy and market environment since 2016,digital inclusive finance will develop faster in areas where traditional financial supply is more sufficient,mainly reflected in the faster expansion of its coverage and deeper penetration of its use.This means that digital inclusive finance develops on the basis of traditional finance and is an innovation and extension of traditional finance.Secondly,based on the conclusion that digital inclusive finance is an innovative development of traditional finance,will the development of digital inclusive finance promote or inhibit FDI inflow? From the perspective of FDI supplier,according to the theory of location choice of international investment,financial development will improve the efficiency of China’s financial system and help attract FDI to inflow.There may be a "complementary effect" between digital inclusive finance and FDI.From the perspective of demand side,combined with the theory of financial development,financial development will ease the degree of financial repression in China,reduce China’s demand for foreign investment and curb FDI inflow.There may be a "substitution effect" between digital inclusive finance and FDI.Empirical research shows that the development of digital inclusive finance significantly promotes the inflow of FDI,which is mainly reflected in the expansion of the coverage of digital finance and the increase of the depth of the use of digital payment business and digital credit investigation business.Meanwhile,the development of traditional finance represented by bank credit has a significant restraining effect on FDI inflow.The possible reasons why digital inclusive finance and traditional finance have opposite effects on FDI inflows are as follows: The development of traditional finance is mainly reflected in the expansion of financial supply scale,and its effect on FDI inflow is mainly "substitution effect".Digital inclusive finance brings about the improvement of financial efficiency and optimization of financial structure,and can better play the "complementary effect" of financial development on FDI inflow.Thirdly,based on the relevant researches on digital inclusive finance and the influencing factors of FDI location,this paper investigates the possible influence mechanism of digital inclusive finance on FDI inflow.This paper points out that the relationship between finance and FDI inflow includes two aspects.One is the "financial effect" brought by financial development itself.The financial development of a country not only affects the cost and earning of MNEs’ investment in the country,but also affects the country’s demand for FDI.The other is the "economic effect" brought by financial development.As a supporting structure mechanism of economic development,financial development is bound to have an impact on economic development,and the resulting economic consequences may affect the inflow of FDI.Digital inclusive finance is an emerging financial model different from traditional finance,with new characteristics such as "digital" and "inclusive",which will also bring economic effects that traditional finance does not have.According to relevant literature,this paper finds that the economic effects of digital inclusive finance are mainly reflected in alleviating poverty,promoting innovation and entrepreneurship,and stimulating residents’ consumption.According to the research on the influencing factors of MNEs’ investment in China,with the change of FDI flow trend and domestic and foreign economic environment,the role of traditional factors in FDI location selection is gradually weakened,but China’s huge market potential always dominates the inflow of FDI.Meanwhile,emerging factors such as regional innovation capability are playing an increasingly important role.This paper considers the role of the development of innovation and entrepreneurship and the rise of household consumption level brought by the development of digital inclusive finance in China,so as to investigate the impact of the economic effect of digital inclusive finance on FDI inflow.The results are as follows: First,the "financial effect" of digital financial inclusion promotes the inflow of FDI.The development of digital inclusive finance has improved the allocation efficiency of financial market,alleviated the degree of financial repression in China,and thus played the role of China’s efficient financial system in attracting FDI.This effect mainly exists in eastern China.Comparative study shows that traditional finance can hardly influence the inflow of FDI through this mechanism.Second,the "economic effect" of digital financial inclusion promotes the inflow of FDI.The innovation and entrepreneurship effect of digital inclusive finance promotes the inflow of FDI.The development of digital inclusive finance attracts the inflow of FDI by enhancing regional innovation and entrepreneurship capacity,and this effect is very significant in eastern,central and western China.Although the development of traditional finance can alleviate the inhibiting effect of FDI inflow by enhancing regional innovation and entrepreneurship,this effect only exists in the eastern region.Second,the consumption effect of digital inclusive finance promotes the inflow of FDI.The development of digital inclusive finance has significantly stimulated the rise of household consumption level,further released China’s market potential,and thus attracted the inflow of FDI.This effect is reflected in both the eastern and western China.This paper also finds that traditional finance does not have such an influence mechanism on FDI inflow.Finally,this paper studies the economic consequences of digital inclusive finance and FDI inflow,and finds that under the promotion effect of digital inclusive finance on FDI inflow,the two jointly promote the high-quality development of regional economy.The analysis shows that all dimensions of digital inclusive finance can promote high-quality economic development together with FDI,no matter its coverage breadth,usage depth or degree of digitalization.Sample test and lag test show that the promotion effect of digital financial inclusion and FDI inflow on high-quality economic development is significant in eastern,central and western China,and still significant after one to three periods of lag of explanatory variables,indicating that the promotion effect is not only universal,but also persistent.The main contributions of this paper are as follows: First,the research on the economic effect of digital inclusive finance is expanded from closed economy to open economy,enriching the role of digital inclusive finance.Second,From the perspective of FDI supply side and demand side,this paper comprehensively explores the influence of digital inclusive finance on China’s FDI inflow.Thirdly,the effect of digital inclusive finance on financial market itself and real economy is divided into "financial effect" and "economic effect",and the mechanism of digital inclusive finance on FDI inflow is more clearly explained.Fourthly,through the analysis and comparison of digital inclusive finance and traditional finance,it points out the connection and difference between traditional finance and digital inclusive finance,discusses the different influences of digital inclusive finance and traditional finance on FDI inflow,and tries to explain the reasons for the different influences,thus enriching the research on the relationship between traditional finance and digital inclusive finance as well as the financial development of host country and FDI inflow.Fifthly,by analyzing the economic consequences of the development of digital inclusive finance and FDI inflow,this paper expounds the functional relationship and internal consistency among digital inclusive finance,FDI inflow and high-quality economic development,which has guiding significance for China to promote high-quality economic development through financial reform and FDI introduction at the present stage.