Government Size and Regional Capital Flows in China

Capital flows are key variables supporting the sustainability of economic growth. Based on a dataset of 31 provinces in China over 1997-2014, this paper utilizes the system generalized method of moments (System GMM) to investigate the determinants of capital flows and analyses the impact of government size on capital flows. Preliminary results show that government size exerts a negative effect on capital inflows. Specifically, government spending on capital construction and administration crowds out capital inflows significantly, while government spending on science and technology crowds in capital inflows dramatically. In addition, high quality human capital, advanced financial development, and high-level trade openness are conducive to capital inflows. High tax and labor cost impede capital inflows. These results provide proof for China's government to reduce the size of government spending appropriately and optimize its government expenditure structure for the purpose of crowding in capital inflows.