The impact of incentive policies on foreign direct investment misallocation

Abstract

Certain institutional barriers of China can hinder investments. This paper examines the impact of fiscal incentives and implicit incentive policies on the degree of resource distortions in FDI allocation by using the provincial data of manufactures from 1994 to 2013. This paper reviews the empirical literature, specifically addressing various types of incentives for Foreign Direct Investment (FDI) and how FDI can lead to resource reallocation effects. The analysis shows that fiscal incentive policies to inward FDI tend to decrease the resource misallocation, whereas implicit incentives increase the resource misallocation.