Skip to main content
SpringerLink
Log in

Fiscal decentralization and multinational firms’ ownership: evidence from China

  • Original Paper
  • Published:
Economics of Governance Aims and scope Submit manuscript

Abstract

China’s fiscal decentralization increases the incentive for local governments to maintain economic prosperity and improve institutional environments for multinational firms. This study investigates the impact of fiscal decentralization on the ownership shares of multinational firms in China. Multinational firms located in regions with higher degrees of fiscal decentralization are found to own larger shares of their foreign subsidiaries. This result is consistent under various robustness checks, including instrumental variables estimations. The finding suggests that multinational firms respond to local fiscal decentralization by increasing their participation in investment. This study therefore provides additional evidence for the beneficial effect of fiscal decentralization on China’s economic growth by highlighting the risk-mitigating role of fiscal decentralization.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Arikan GG (2004) Fiscal decentralization: a remedy for corruption. Int Tax Pub Finance 11: 175–195

    Article  Google Scholar 

  • Bahl R, Wallich C (1992) Intergovernmental fiscal relations in China. Policy Research Working Paper WPS 863, the World Bank

  • Bardhan P (2002) Decentralization of governance and development. J Econ Persp 16(4): 185–205

    Article  Google Scholar 

  • Bardhan P, Mookherjee D (2000) Capture and governance at local and national levels. Am Econ Rev 90(2): 135–139

    Article  Google Scholar 

  • Bardhan P, Mookherjee D (2006) Decentralization, corruption and government accountability: an overview. In: Rose-Ackerman S (eds) International handbook on the economics of corruption. Edward Elgar, Northampton, pp 161–188

    Google Scholar 

  • Baskaran T (2011) Fiscal decentralization, ideology, and the size of the public sector. Eur J Polit Econ 27: 485–506

    Article  Google Scholar 

  • Blanchard O, Shleifer A (2001) Federalism with and without political centralization: China versus Russia. IMF Staff Papers 48(4): 171–179

    Google Scholar 

  • Chi P, Kao C (1995) Foreign investment in China: a new data set. China Econ Rev 6(1): 149–155

    Article  Google Scholar 

  • Cole MA, Elliot RJR, Zhang J (2009) Corruption, governance and FDI location in China: a province-level analysis. J Dev Stud 45(9): 1494–1512

    Article  Google Scholar 

  • Desai MA, Foley FC, Hines JR Jr (2004) The costs of shared ownership: evidence from international joint ventures. J Financ Econ 73(3): 323–374

    Article  Google Scholar 

  • Dincer OC, Ellis CJ, Waddell GR (2010) Corruption, decentralization and yardstick competition. Econ Gov 11(3): 269–294

    Article  Google Scholar 

  • Djankov S, Glaeser E, La Porta R, de Silanes FL, Shleifer A (2003) The new comparative economics. J Comp Econ 31: 595–619

    Article  Google Scholar 

  • Enikolopov R, Zhuravskaya E (2007) Decentralization and political institutions. J Pub Econ 91: 2261–2290

    Article  Google Scholar 

  • Fisman R, Gatti R (2002) Decentralization and corruption: evidence across countries. J Pub Econ 83: 325–345

    Article  Google Scholar 

  • Fisman R, Gatti R (2002) Decentralization and corruption: evidence from U.S. federal transfer programs. Pub Choice 113: 25–35

    Article  Google Scholar 

  • Gatignon H, Anderson E (1988) The multinational corporation’s degrees of control over foreign subsidiaries: an empirical test of a transaction cost explanation. J Law Econ Organ 4: 305–336

    Google Scholar 

  • He C (2003) Entry mode and location of foreign manufacturing enterprises in China. Eurasian Geography Econ 44(1): 399–417

    Google Scholar 

  • Head K, Mayer T (2004) Market potential and the location of Japanese investment in the European Union. Rev Econ Stat 86(4): 959–972

    Article  Google Scholar 

  • Henisz WJ (2000) The institutional environment for multinational investment. J Law Econ Organ 16(2): 334–364

    Article  Google Scholar 

  • Henisz WJ, Williamson OE (1999) Comparative economic organization—within and between countries. Bus Polit 1(3): 261–276

    Google Scholar 

  • Iimi A (2005) Decentralization and economic growth revisited: an empirical note. J Urban Econ 57: 449–461

    Article  Google Scholar 

  • Jin H, Qian Y, Weingast BR (2005) Regional decentralization and fiscal incentives: federalism, Chinese style. J Pub Econ 89(9–10): 1719–1742

    Article  Google Scholar 

  • La Croix SJ, Xu Y (1995) Political uncertainties and Taiwan’s investment in Xiamen’s Special Economic Zone. In: La Croix SJ, Plummer M, Lee K (eds) Emerging patterns of East Asian investment in China from Korea, Taiwan, and Hong Kong. M. E. Sharpe, Armonk, pp 123–142

    Google Scholar 

  • La Porta R, de Silanes FL, Shleifer A, Vishny R (1999) The quality of government. J Law Econ Organ 15(1): 222–279

    Article  Google Scholar 

  • Levine R, Renelt D (1992) A sensitivity analysis of cross-country growth regressions. Am Econ Rev 82(4): 942–963

    Google Scholar 

  • Lin J, Liu Z (2000) Fiscal decentralization and economic growth in China. Econ Dev Cult Change 49(1): 1–21

    Article  Google Scholar 

  • Ma J (1995) Modeling central-local fiscal relations in China. China Econ Rev 6(1): 105–136

    Article  Google Scholar 

  • Montinola G, Qian Y, Weingast BR (1995) Federalism, Chinese style: the political basis for economic success in China. World Polit 48: 50–81

    Article  Google Scholar 

  • OECD (2000) Main determinants and impacts of foreign direct investment on China’s Economy. Working papers on international investment no. 2000/4, OECD

  • Oxley JE (1997) Appropriability hazards and governance in strategic alliances: a transaction cost approach. J Law Econ Organ 13: 387–409

    Article  Google Scholar 

  • Phillips-Patrick FJ (1992) Political risks and organizational form. J Law Econ 34(2): 675–693

    Article  Google Scholar 

  • Qian Y, Weingast BR (1997) Federalism as a commitment to preserving market incentives. J Econ Persp 11(4): 83–92

    Article  Google Scholar 

  • Rodriguez P, Uhlenbruck K, Eden L (2005) Government corruption and the entry strategies of multinationals. Acad Manag Rev 30(2): 383–396

    Article  Google Scholar 

  • Smarzynska BK, Wei S (2000) Corruption and composition of foreign direct investment: firm-level evidence. NBER Working Paper no. 7969

  • Smarzynska Javorcik B (2004) Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. Am Econ Rev 94(3): 605–627

    Article  Google Scholar 

  • Smarzynska Javorcik B (2006) Technological leadership and the choice of entry mode by foreign investors. In: Hoekman B, Smarzynska Javorcik B (eds) Global integration & technological transfer. World Bank Publications, Washington

    Google Scholar 

  • Sun H (1999) Entry modes of multinational corporations into China’s market: a socioeconomic analysis. Int J Soc Econ 26(5): 642–659

    Article  Google Scholar 

  • Tao Z, Wang S (1998) Foreign direct investment and contract enforcement. J Comp Econ 26: 761–782

    Article  Google Scholar 

  • Tian X (2007) Managing international business in China. Cambridge University Press, Cambridge

    Book  Google Scholar 

  • Wallis JJ (2005) Constitutions, corporations, and corruption: American states and constitutional change, 1842–1852. J Econ Hist 65(1): 211–256

    Article  Google Scholar 

  • Wang S (1997) China’s 1994 fiscal reform: an initial assessment. Asian Surv 37(9): 801–817

    Article  Google Scholar 

  • Wang Y (1997) Investment in China: a question and answer guide on how to do business. American Management Association, New York

    Google Scholar 

  • Wang Y (2010) Fiscal decentralization, endogenous policies and foreign direct investment. Working Paper, HKUST

  • Weingast BR (1995) The economic role of political institutions: market-preserving federalism and economic development. J Law Econ Organ 11(1): 1–31

    Google Scholar 

  • Williamson OE (1996) The mechanisms of governance. Oxford University Press, New York

    Google Scholar 

  • Zhang KH (2000) Why is U.S. direct investment in China so small?. Contemp Econ Policy 18(1): 82–94

    Article  Google Scholar 

  • Zhang T, Zou H (1998) Fiscal decentralization, public spending, and economic growth in China. J Pub Econ 67(2): 221–240

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, National Tsing Hua University, Hsinchu, 300, Taiwan

    Shih-Ying Wu

  2. Department of Business Administration, National Chin-Yi University of Technology, Taiping, Taichung, 411, Taiwan

    Mei-Jane Teng

Authors
  1. Shih-Ying Wu
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Mei-Jane Teng
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Shih-Ying Wu.

Additional information

The authors gratefully acknowledge financial support from NSC of Taiwan through grant NSC96-2415-H-007-003-MY2.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Wu, SY., Teng, MJ. Fiscal decentralization and multinational firms’ ownership: evidence from China. Econ Gov 13, 237–262 (2012). https://doi.org/10.1007/s10101-012-0108-8

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10101-012-0108-8

Keywords

JEL Classification

Search

Navigation