The Impact Of Foreign Bank Presence On Foreign Direct Investment In China

The connection between foreign bank presence and foreign direct investment may be particularly relevant for an emerging economy like China because the supply of financial services provided by banks may act as a constraining factor, i.e., FDI may be held back by the lack of technical-financial expertise locally. Foreign bank presence may then enable and foster FDI and not simply resulting from it.This study has valuable practical meanings. The regional distribution of foreign banks in China is highly unbalanced. At the same time, China offers quite favorable conditions in order to attract more foreign direct investment under the gradual open-up policy. When combine these facts together, we could find the effect of foreign bank presence on foreign direct investment. More importantly, our study has a clear economic meaning for China, that is, how FDI is correlated with home-country sector development.We therefore study the impact on FDI of foreign bank presence in China. Our estimates demonstrate that FDI across regions in China is increasing in the existing network of regional branches of foreign banks, also when instrumented with the timing of the regional phasing out of the local limits for foreign banks on local currency business. Because foreign banks from different source countries have diverse expertise due to the various sector structures of source countries. The absolute numbers may be insufficient. From this point of view, we assume that regional FDI increases in sectors when banks from source countries are locally present where these specific sectors are importantly represented.Thus FDI and foreign bank presence are interacted with importance of sector in source country and in region respectively. This effect is particularly strong for regional FDI in those sectors when banks from source countries are locally present where these specific sectors are importantly represented, which supports our hypothesis.The structure of the paper is organized as follows. Section2reviews relevant literatures. Section3describes the evolution of foreign direct investment and foreign bank presence in China since1978. Section4analyzes sample and defines the variables. Section5estimates the impact of foreign bank presence on FDI in China. Section6concludes.