Here (unrated version here) is an abstract from a fascinating paper on fiscal decentralization and international direct investment in India and China. Yong Wang argues, “Endogenous procedures toward FDI are advantageous only once both central and local government authorities advantage”. Fiscal decentralization has a non-monotonic and significant effect on FDI. 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 inadequate fiscal decentralization makes the local governments vulnerable to capture by the protectionist special interest groups. Moreover, the neighborhood government’s preference for FDI can be endogenously polarized; therefore, a small change in fiscal decentralization across certain threshold ideals may lead to a dramatic difference in equilibrium FDI inflows. Empirical investigations support that the difference in fiscal decentralization is an important reason behind the nine-fold difference in FDI per capita between China and India.
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Cross-country regression results also support the inverted-U romantic relationship. Inverted-U relationship between FDI per capita and fiscal decentralization (assessed by sub-national government’s overall income share). China’s central and local government authorities are more intense in appealing FDI inflows than India’s. China’s central government motivates … Read more