Property rights protection and outward foreign direct investment: Evidence from China

Abstract

To explain the remarkable increase in the amount of outward foreign direct investment (OFDI) from China, we utilize firm-level OFDI data and employ a difference-in-differences design to identify the causal effect of the Property Law enacted in 2007 on firms’ OFDI decisions. The results reveal that, first, the enactment of the Property Law increases the likelihood and the frequency of OFDI. Second, financial constraints are the main driving force motivating firms’ OFDI. Third, the enactment of the Property Law has heterogeneous effects. Firms located in regions with a low degree of financial marketization or a high degree of government intervention experience a more pronounced effect. This suggests that the quality of the institutions is important. Overall, we present a novel explanation for the sharp increase in the amount of OFDI from China after 2007 and provide new empirical evidence on the effect of security interest system reform.

KEYWORDS:

• Outward foreign direct investment
• property law
• financial constraints
• difference-in-differences design

JEL Classifications:

• F21
• K11
• P37

Acknowledgement

Youth Scholar Team in Social Sciences of Wuhan University ‘New Perspective for Development Economics Research’

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The world ranking of GDP per capita is based on the statistics of 2007, and the data are derived from the World Economic Outlook of the International Monetary Fund (IMF).

2 The financial marketization index includes subcomponents of the marketization index derived from the National Economic Research Institute (NERI) in China. This index is widely used to measure the marketization progress in China. The index and all its subcomponents are measured on a 0–10 scale. The original data on marketization index are derived from the National Bureau of Statistics and the Chinese enterprise survey conducted by the Development Research Center of the State Council.

3 According to the classification standard of BEC, the intermediate input is identified if it belongs to the following categories: 111, 121, 21, 22, 31, 322, 42, and 53.

Additional information

Funding

This work was supported by National Natural Science Fund of China: [grant no 72373112]; Major Project of National Social Science Fund of China: [grant no 20&ZD105].