FDI And Financial Market Efficiency: Experience From China

A large sum of FDI flow into China in recent years. Many scholars have analyzedthe reasons of inflows of FDI into China and effects of FDI on China’s economygrowth．In this paper, it is reconsidered why China would like to receive a large sumof FDI．On the basis of massive literature reviews，the paper explained the dynamicrelationship between FDI and financial market．Provinces with well-developedfinancial market gain significantly from FDI. However, few scholars study the impactof FDI on the efficiency of financial market.In this paper, we focused on analyzing the impact of FDI on the efficiency offinancial market. Theoretical research found that the impact of FDI on the efficiencyof financial market through two mechanisms. On the one hand, FDI by “own planteffect”,“horizontal effect” and“vertical effect” three channels, leading the creditfunds into private enterprise, thus easing financing constraints of private enterprise,improving the financial allocation efficiency at a certain extent. On the other hand,FDI through imported inflation, exacerbating the credit constraints, so that the savingscan not be effectively translated into investment, thus reducing the efficiency of theallocation of the financial market. FDI is conducive to the improvement of theefficiency of financial market, depends on these two mechanisms who dominated.Based on our panel data estimation of China’s29provinces during the period of1995～2010,we find that at the degree of current market, FDI could improve the efficiency offinancial market. The empirical analysis in the sub-region, the impact of FDI on theefficiency of financial market, the eastern region is a significant role, and in thewestern area of FDI does not appear to produce a role in promoting the efficiency offinancial market. Although FDI could improve the financial allocation efficiency at acertain extent, In the long run, improving the domestic efficiency of financial marketis more important than the over-reliance on FDI．We should reduce the excessivereliance on FDI，Vigorously develop the domestic financial market and promote theprocess of market-oriented financial market．...