Abstract
This study investigates whether the length of investment layers for FDI in China is related to capital investment efficiency. We measure the length of investment layers of a multinational firm using the number of layers from the parent firm to the lowest-tier subsidiary. We argue that the agency problems and information asymmetry between corporate insiders and outside capital providers increase with the number of layers, and reduce the creditors’ willingness to provide capital. Using the sensitivity of investment to cash flow to measure investment efficiency, we find that investment layers decrease investment efficiency. In addition, we also find that the strength of legal environments and the level of market development in each province can attenuate the negative association between investment layers and investment efficiency .
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