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Governance and Foreign Investment in China, India, and Taiwan

Credibility, Flexibility, and International Business

Yu Zheng

Publication Year: 2014

Yu Zheng challenges the idea that democracy is the prerequisite for developing countries to attract foreign direct investment (FDI) and promote economic growth. He examines the relationship between political institutions and FDI through the use of cross-national analysis and case studies of three rapidly growing Asian economies with a focus on the role of microinstitutional “special economic zones” (SEZ). China’s authoritarian system allows for bold, radical economic reform, but China has attracted FDI largely because of its increasingly credible investment environment as well as its central and local governments’ efforts to overcome constraints on investment. India’s democratic institutions provide more political assurance to foreign investors, but its market became conducive to FDI only when the government adopted more flexible investment policies. Taiwan’s democratic transition shifted its balance of policy credibility and flexibility, which was essential for the nation’s economic takeoff and sustained growth. Zheng concludes that a more accurate understanding of the relationship between political institutions and FDI comes from careful analysis of institutional arrangements that entail a trade-off between credibility and flexibility of governance.

Published by: University of Michigan Press

Title Page, Copyright Page

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pp. i-vi


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pp. vii-viii

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pp. ix-xiii

Completion of this book would be impossible without help and support from many people. I am privileged to have had a superb committee guiding me through my dissertation at the University of California, San Diego: Peter Cowhey, Susan Shirk, Lawrence Broz, Roger Gordon, Stephan Haggard, and Barry...

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Chapter 1. Political Institutions, Governance, and Foreign Direct Investment

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pp. 1-24

On March 22, 2010, Google, the company providing the world’s largest web search engine, decided to pull its search service out of China, the largest Internet-using country. Google spokespersons claimed that the company could no longer tolerate the excessive Internet censorship and cyber spying there. A...

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Chapter 2. Credibility, Flexibility, and International Business: Cross-National Evidence

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pp. 25-49

What political attributes make developing countries attractive to foreign direct investment (FDI)? Early studies of dependent development suggested that autocratic regimes would be more favored by foreign investors, because alliances between dictators and multinational corporations (MNCs) were more...

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Chapter 3. Incentives and Commitment: The Political Economy of Development Zones in China

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pp. 50-76

Successful economic policy requires political actors who can keep their promises. But autocrats seem to be less capable of making credible commitments than democratic governments. Thus, China’s stupendous economic performance is both amazing and puzzling. By almost all accounts, foreign direct...

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Chapter 4. Local Accountability under Authoritarianism: Evidence from Development Zones in China

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pp. 77-102

The previous chapter addressed China’s growth myth: in the absence of credible institutions, an authoritarian regime, through specific institutional arrangements, can credibly commit itself to attracting foreign investment and promoting growth. Indeed, the setup of development zones, initially as a flexible institutional...

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Chapter 5. Unbundling the Rule of Law in China: Local Lawmaking Power and Private Investment

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pp. 103-131

There is consensus among economists and political scientists that economic growth requires a legal system that offers secure property rights and the enforcement of contracts (North 1990). Protection of property rights, shaping the relationship between the state and citizens, affects investors’ incentive for...

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Chapter 6. The Political Economy of Special Economic Zones in India

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pp. 132-158

Just as puzzling as China’s success in attracting FDI under the authoritarian rule, which challenged conventional wisdom, is India’s long-delayed growth of FDI under the democratic system. Between 1980 and 2010, India received $200 billion of cumulative FDI inflows, less than one-fifth of the amount China...

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Chapter 7. Democratic Transition, Institutional Innovation, and FDI in Taiwan

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pp. 159-185

The cases of China and India suggest that countries with distinct political regimes can use similar institutional innovations to address their governance problems, albeit in different ways. However, since neither country has experienced any significant change in their political institutions, it is unclear how political transition...

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pp. 186-200

This book has challenged the conventional wisdom that democratic institutions, by imposing a self-enforcing mechanism to enhance governments’ policy credibility, are the prerequisite for countries attempting to attract foreign investment and promote sustainable growth. I have argued that policy credibility...

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Appendix on Data

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pp. 201-204

The quantitative data used throughout this book are from four layers: cross-national, provincial, city, and zone-level data sets. In particular, the three sub-national data sets were constructed based on numerous primary sources from fieldwork interviews, news sources, and official statistics in China...


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pp. 205-216


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pp. 217-244


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pp. 245-254

E-ISBN-13: 9780472029570
E-ISBN-10: 0472029576
Print-ISBN-13: 9780472119042

Page Count: 264
Publication Year: 2014