Research on the impact of financial expansion on FDI

Abstract

As China is currently in a new stage of opening up to the outside world, there is widespread concern about how to attract foreign direct investment. Given the relative paucity of literature examining the effect of financial expansion on FDI, this paper examines the effect of the value added of the financial sector as a share of GDP on FDI per capita for each province in China from 2003 to 2018 to verify relevant mechanisms. The results find that financial expansion inhibits domestic FDI inflows and the effect has regional heterogeneity, which may be caused by inadequate financial system reform and misallocation of financial resources. It is therefore important to promote the high-quality development of the financial sector and improve the rational allocation of factors while China's economy continues to grow.