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FDI And Economic Growth: The Role Of Gradual Financial Deregulation

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Executive Summary

The authors argue that financial liberalization and FDI as a measure of openness complement each other. The intuition is that domestic financial reform will lower the cost for international advanced technology transfer through direct investment. The resultant higher inflow of FDI decreases the imitation cost of local firms, raising their imitation speed and thus the growth rate of the host country. They use the province-level financial deregulation experience of China from 1981 to 1998 to examine the prediction. They address issues of endogeneity of FDI by instrument with a series of weather indicators.

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