Inter-provincial Capital Flows-Theory And Empirical Research

The inter-province capital mobility is related to the market scale of the wholecountry and the capital’s efficient use.Adam Smith holds the view that division oflabor is limited by the market scale.Occasionally,factor mobility is the directreflection of market scale.The full use of factors also has an impact on the ultimateproduction.Our paper focuses on the inter-province capital mobility after the1992’sreform which deeply changes the marketing economic institution between1992and2009.We use the newest methods of panel time series and estimate the relationship ofinter-province saving rates and investment rates.Firstly we find out that saving ratesand investment rates are I(1) variables after the unit root tests.There existscointegrations between them.The traditional fixed and random-effects models acquirethe result that they are highly correlated. We can know that this estimate overlooksthe individual heterogeneity,correlation and the time-variant of saving-retainedcoefficients. We further test the individual correlations and prove that there aresignificant correlations among distinct individuals.To overcome the drawbacks oftraditional estimates, we use the MG and CMG estimators respectively,and gain thatthe coefficients of CMG estimate is insignificant.The CMG estimator has the goodstatistical character.Next we use the GMM method to estimate the saving-retainedcoefficients and it is still insignificant.Adding the fdi to the right-hand equation weget the same insinificant coefficients.Our result is different from that of Licheng(2010) and Boyreau-Debray and Wei(2004).The mainly reason is that our timeinterval is1992-2009,during the period the factors’mobility has largely increased.In1992our country plans to build up the marketing economic institution.Thecentral gavernment makes decisions to destroy the local protectionism.It reforms thecentral-local rule of taxes and restructures the financial institusions,plus the entry intothe WTO,which are all useful to the factor mobility.Local governments have theincentives to promote the factor mobility under the model of political centralizationand economic decentralization.They have the decision-making power in economy andclaims for promotion.To abtain the political promotion,they must depend on theeconomic performance.Comparing the capital immobility with capital mobility, capital flows is favorable to economic growth, and the central government is a welfaregovernment.The local governments’ pursuit of economic growth is consistent with thegoal of the central government.In order to achieve faster economic growth andpolitical promotion, local governments increase infrastructure investments as well astake a good policy to attract capital inflows, the competition between localgovernments makes inter-provincial capital mobility enhanced. This interpretation isnot the same as the interpretation that capital flows automaticly to high incomeplaces,which is the intervention of the local government that makes capital flowsincrease.. Li Cheng (2010) also confirmed that significant Granger causality does notexist between the rate of investment and GDP growth in the provinces,which impliesthat capital does not necessarily flow to high income places.