China & World Economy / 40–59, Vol. 23, No. 4, 2015
Impact of Foreign Bank Presence
on Foreign Direct Investment in China
Steven Ongena, Shusen Qi, Fengming Qin*
Abstract
We analyze the impact of foreign bank presence on foreign direct investment (FDI) in China. The connection between the two could be particularly relevant for an emerging economy like China because the supply of financial services provided by banks may act as a constraining factor. Foreign bank presence may then enable and foster FDI and not simply result from it. Our estimates demonstrate that FDI across regions in China is increasing in the existing network of regional branches of foreign banks, which itself is driven (and, therefore, instrumented) by the timing of the regional phasing out of the local limits for foreign banks on local currency business. The effect of foreign bank presence on FDI is particularly strong for some specific sectors (farming, manufacturing, construction, transportation, wholesale/retail trade and real estate) if those sectors are strongly represented in the source economies.
Key words: China, foreign bank presence, foreign direct investment
JEL codes: G21, F21