The Research On Multinational Bank’s Direct Investment In China And It’s Impact On Financial Industry

Since China’s entry into the WTO in2001, the direct investment from variouskinds of multinational corporations, including the multinational banks has rapidlygrown. Till the end of2005when the transition period of China’s entry into the WTOhas ended, many restrains for the direct investment in China from multinational bankswere cancelled. Therefore, the direct investment from multinational banks has adramatic growth which has great impact on China’s economy, especially, on thedevelopment of China’s financial industry. So summarizing up the general influencemade by the direct investment from multinational banks and making empiricalanalysis on the degree of the influence (mentioned above) has gotten its greatsignificance on rationally introducing direct investment from multinational banks.Reviewing the progress of the direct investment of multinational banks in Chinasince the reform and opening up (1978) four phases of its development can be devided:the start phase, the development phase, the adjustment phase and the comprehensivedevelopment phase. The main features of the direct investment from multinationalbanks on China’s sustainable development are: the branches set up by multinationalbanks from around the world (including the wholly-owned banks, joint venture banks,branches of multinational banks and the representative offices of multinational banks)increase their number and enlarge their investment.After summing up the results of previous studies, this paper makes a theoreticalanalysis according to the following theories, the direct investment theory, theexternality theory and the financial structure theory. The impact of the directinvestment from multinational banks mainly reflected in the positive externalities andthe negative externalities of China’s financial industry, in which spillover effects is thefocus of this paper. The spillover effects of multinational banks’ direct investment oneconomic growth in the financial industry include the effect of innovation of financialinstruments, the effect of diversification of financial institutions, the effect of optimization of the financial structure and other effects (including domestic capitalformation effect and international financialization effect). While the main spillovereffects of China’s financial industry include the employment creation effect of thefinancial industry and the employment quality promotion effect.On the basis of theoretical analysis, this paper selects index of the directinvestment from multinational banks in China’s financial industry, the index ofChina’s financial industry development, the index of the employment of the china’sfinancial industry, respectively measured by the paid-up capital of multinational banksin China, the added value of China’s financial industry, the number of the employmentof China’s financial industry, using Engle-Granger two-step method make thecointegration test respectively on the long-run equilibrium relationship between theamount of direct investment from multinational banks and the development of China’sfinancial industry, between the direct investment (mentioned above) and theemployment growth of the financial industry. TO confirm the cointegrationrelationship was caused by casual connection, Granger causality test is also done. Inthe end of the empirical analysis, the error correction model is built to reflect the shortterm influence between the indexes.This research indicates that the direct investment of multinational banks has animportant impact on economic growth of China’s financial industry–the spillovereffects, and is mainly through the demonstration-imitate transmission mechanism andthe competition-against transmission mechanism.This research also indicates that the direct investment of multinational bankshave less impact on the employment of China’s financial industry for the pathselection of direct investment of multinational banks, the balance effects of the jobcreation effect and the extrusion effect of the direct investment, the scale ofmultinational banks, and the capital-intensive characteristic of China’s financialindustry.The improving role played by the direct investment of the multinational banks onChina’s economic growth in financial industry requires us to further rationalize theinvestment for its greater spillover effect, to promote the development of China’s financial industry, to improve the efficiency of our capital financing and to provideguarantee for our country’s sustained economic development.