تمرکز زدایی مالی، سیاست های درون زا، و سرمایه گذاری مستقیم خارجی : تئوری و شواهد به دست آمده از چین و هند

A political-economy model is developed to explain why fiscal decentralization may have a non-monotonic effect on FDI inflows through endogenous policies. Too much fiscal decentralization hurts central government incentives, whereas too little fiscal decentralization renders the local governments vulnerable to capture by the protectionist special interest groups. Moreover, the local government's preference for FDI can be endogenously polarized; therefore, a small change in fiscal decentralization across certain threshold values may lead to a dramatic difference in equilibrium FDI inflows. Empirical investigations support the idea that the difference in fiscal decentralization is an important reason for the nine-fold difference in FDI per capita between China and India. Cross-country regression results also support the inverted-U relationship.

Foreign direct investment (FDI) helps facilitate economic growth in developing countries because it not only brings more physical capital but also embodies better foreign technology.1 However, in reality, government policies toward FDI vary tremendously across countries. For example, China's central government encourages FDI inflows by authorizing long tax holidays and tariff reductions on imported inputs to foreign-invested firms. Meanwhile, local governments in China compete aggressively for FDI by offering favorable policies, including simplifying license application, charging low fees for land use, building facilitating infrastructure, etc. In contrast, we did not see such enthusiasm for FDI at the central or the local level of the Indian government until very recently. For instance, the corporate income tax rate on foreign-invested firms was 41% in India but well below 33% in China in 2004.2 The de facto institutional barriers to FDI are also much higher in India. It takes almost 50% longer to obtain a license and it is five times more costly (relative to its own per capita income) to start a business in India than China, according to the World Bank (2005). India's infrastructure is also significantly inferior to China's (Bosworth and Collins, 2007; Singh, 2005). In 2005, China's aggregate FDI inflow was more than US$ 72 billion, approximately twelve times that of India, and China's per capita FDI was nine times greater according to UNCTAD (2008). Bosworth and Collins (2007) find that such a significant difference in FDI is surprising because it cannot be explained by the countries' differences in economic fundamentals. Srinivasan (2006) notes, “Although India has attracted far less FDI [than China], it is not because of the lack of potential opportunities in India, but largely because of policy hurdles and other constraints on investment.” Panagariya (2006) emphasizes that India's under-performance, FDI included, is the result of “stupid domestic policies” such as not improving the national infrastructure. Rodrik and Subramanian (2005) also argue that India's policy toward FDI largely reflects the reluctant “attitude” of the government.

This paper develops a theoretical model to show how two developing economies with identical economic fundamentals could have very different policies toward inward FDI (or, better foreign technology) and how these endogenous policies can translate into a tremendous difference in equilibrium FDI inflows. We argue that fiscal decentralization can have a non-monotonic and sometimes significant effect on the policies and FDI. Too much fiscal decentralization may hurt the central government's incentives, so the central government will choose policies that induce local governments to block FDI. On the other hand, too little fiscal decentralization may force local governments to succumb to pressures from protectionist special interest groups. Consequently, policies toward FDI are sufficiently favorable only when fiscal decentralization is within an endogenous medium range. The model also predicts that a small change in fiscal decentralization generically does not significantly change equilibrium policies and FDI; however, when crossing an endogenous country-specific cutoff value, a small deviation in fiscal decentralization diametrically shifts the local government's attitude and results in dramatically different policies and amounts of FDI in the equilibrium. The attitudinal polarization of the local government toward FDI is endogenously attributable to the fact that the negative profit-reduction effect is diminishing whereas the tax-base expansion effect is increasing as FDI increases. Therefore, the net benefit of FDI for the local government first decreases and then increases with FDI. This result suggests that the traditional Tiebout effect no longer works when local governments have insufficient incentives to compete for the mobile factors, especially when the net benefit from attracting the mobile factors is not monotonic. Simulations and calibrations using data from China and India support these theoretical findings, which are further substantiated by the cross-country regressions using a much larger country sample.