The Impact Of Financial Market Level On FDI Spillover Effect

FDI (foreign direct investment，abbr. FDI) is essentially the capital flow and allocation inworldwide. Therefore, it should have a high degree of correlation with financial market. However,in retrospect, the previous literature on FDI spillovers, from a macro point of view, mainly focusedon its role in promoting economic growth and chiefly concerned on the determinants of FDIspillovers such as technology, absorptive capacity, FDI characteristics, firm characteristics and soon from a micro perspective. The factor of financial market has not attracted sufficient attention yet.This thesis aims to make clear the impact of financial market level on FDI spillover effect and thethreshold level that financial market amplified FDI spillover. That, to some extent, compensates forgaps and deficiencies in the field of FDI spillovers.I first drew the model came up by Alfaro at el.(2003) studying the role of financial market oneconomic growth to demonstrate that advanced or perfect financial market can enlarge FDIspillover effect. Then, I explain it through the channels of domestic firms and FDI enterprises.Based on that, I tested the view from the angles of national level and province level utilizing theindustry data of manufacturing in China. The empirical results showed that (1) financial market canamplify the FDI spillovers. However, this effect mainly took place though banking sector but notstock market.(2) There is a threshold level for the financial market of each province. Only if thefinancial market level of one province exceeded its threshold level, this amplification effect cangenerate. Finally, according to the findings of theoretical and empirical study and given thedeficiencies that the domestic financial markets promoting FDI spillovers at present, Iattended that, to seek the maximization of FDI spillover effect, banking sector should adjustthe credit structure that excessively tending to large state-owned enterprises in order toenhance the absorption of SME（small-and-medium enterprises, abbr. SME）for FDI spillovers.The stock market could introduce the international board timely or set up foreign departmentso as to provide the financing platform for FDI enterprises. Meanwhile, the governmentshould attach importance to financial deepening reform in order to lower the threshold levelof financial market.