Capital market liberalization and firms' OFDI performance: Evidence from China

This paper examines the effect of capital market liberalization on firms' OFDI performance. Using the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect as a quasinatural experiment, we find that capital market liberalization significantly promotes firms' OFDI both in probability and scale. Three plausible mechanisms are increasing TFP, easing financing constraints, and improving information disclosure quality. Furthermore, the positive effect is more prominent for international firms with overseas businesses, as well as for laborintensive firms. Overall, our study reveals the real effects of capital market liberalization on OFDI, which has meaningful implications for emerging economies.

Automated summary

This paper examines the impact of capital market liberalization on firms' performance in overseas direct investment (OFDI). The study finds that capital market liberalization significantly promotes firms' OFDI in terms of probability and scale. The mechanisms behind this positive effect are increased total factor productivity, eased financing constraints, and improved information disclosure quality. Additionally, the positive effect is more prominent for international firms with overseas businesses and labor-intensive firms. Overall, this study reveals the real effects of capital market liberalization on OFDI and has meaningful implications for emerging economies.