Lee Et Al - 2015

Global Economic Review
Perspectives on East Asian Economies and Industries
ISSN: 1226-508X (Print) 1744-3873 (Online) Journal homepage: https://www.tandfonline.com/loi/rger20
Globalization, Economic Growth and Institutional

Development in China
Chien-Chiang Lee, Chi-Chuan Lee & Chun-Ping Chang
To cite this article: Chien-Chiang Lee, Chi-Chuan Lee & Chun-Ping Chang (2015) Globalization,
Economic Growth and Institutional Development in China, Global Economic Review, 44:1, 31-63,
DOI: 10.1080/1226508X.2015.1011777
To link to this article: https://doi.org/10.1080/1226508X.2015.1011777
Published online: 10 Mar 2015.
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Global Economic Review, 2015
Vol. 44, No. 1, 31–63, http://dx.doi.org/10.1080/1226508X.2015.1011777
Globalization, Economic Growth and

Institutional Development in China
CHIEN-CHIANG LEE*, CHI-CHUAN LEE** &
CHUN-PING CHANG***
*Department of Finance, National Sun Yat-sen University, Kaohsiung, Taiwan, **National Chengchi
University, Taipei, Taiwan, ***Department of Marketing Management, Shih Chien University,
Kaohsiung, Taiwan
ABSTRACT Unlike most previous works which commonly define globalization as a strict
economic characteristic, using the overall globalization index and its three sub-dimensions –
economic, social and political integrations to proxy openness, this paper examines the effect of
globalization on economic growth associated with autocratic institutional in China, using the a
two-step dynamic panel generalized method of moments technique in a panel of 30 provinces,
municipalities and the autonomous regions over the period of 1970–2006. We find that different
globalization indices have different impacts on regional economic growth. Also, autocracy may
harm regional development, but these conclusions are very sensitive to different globalization
variables specifications. Further, considering the interactive effects between globalization and
economic growth, we show that in the period of higher global integration, the higher democracy
(lower autocracy) may harm economic growth in the case of China. We emphasize that
democracy is clearly not a necessary condition for the purpose of economic growth in China.
KEY WORDS: Globalization; economic growth; institutionalized autocracy; China
JEL CLASSIFICATION: F59, O53, C33
1. Introduction
One of the most important developments of modern economic system is the progress
of globalization which often refers to economies and societies become more closely
integrated. On one hand, international trade and finance, for example, have
progressed towards openness at such a pace that the influence of globalization
cannot be ignored. On the other hand, with the development of Internet and
telecommunications, the modern technology is currently facilitating rapid improve-
ment in flows of information and of goods and services, while at the same time
fostering in governments a growing willingness of making corresponding policy
Correspondence Address: Chun-Ping Chang, Department of Marketing Management, Shih Chien

University, Kaohsiung, Taiwan. Email: cpchang@mail.kh.usc.edu.tw
Present address: Chi-Chuan Lee, School of Management, Beijing Normal University, Zhuhai, Guangdong,
China; Chun-Ping Chang, Visiting Research Fellow, School of Economics and Finance, Xi’an Jiaotong
University, Shaanxi
© 2015 Institute of East and West Studies, Yonsei University, Seoul

32 C.-C. Lee et al.
changes focused on reduction or elimination of trade and entry barriers as well as

liberalization of foreign investment. In this wave of globalization, whether
globalization is beneficial to economic performance is a core issue worth to be
deeply investigated. See, for example, Dreher (2006), Chang and Lee (2010), Shen
et al. (2010), Neto and Veiga (2013), Gurgul and Lach (2014), to mention a few.
Investigating the effects of globalization on economic growth has recently been
noticed by a great deal of empirical works, though these numerous studies are
sufficient in the past, but there are still imperfections in accordance with previous
findings. For example, while examining the influences of globalization on economic
growth, globalization is generally considered only for economic dimensions, such as
openness to trade flows, capital mobility or economic integration. Moreover, only
few studies have emphasized the effects of globalization in large developing economy
such as China. As noted by Zhang and Zhang (2003) as well as Lee and Hsieh (2013),
it is virtually certain that China becomes more and more important in the world
economy because of its huge size, rapid economic growth and continuing policy
reforms. The present study bridges this gap in the literature. In this context, while the
numerous works have made a good investigation for the importance of institutional
impact on economic growth (see Frankel & Romer, 1999; Fedderke, 2001; Easterly
& Levine, 2003; Glaeser et al., 2004; Kwon & Yi, 2009; Chen et al., 2012)1; we ask,
does the process of globalization provide greater capabilities for China to pursue
higher regional economic growth under the autocratic regime?
The purpose of this paper is therefore to examine the effects of globalization on
economic growth in a panel of 30 provinces (including municipality and autonomous
regions) in China over the period 1970–2006. To ensure robustness, we next classify
the samples into three regions (Eastern, Central and Western regions) under
geographic characteristics.2 Specifically, different from the traditional measure of
globalization, we utilize the overall globalization index originally developed by
Dreher (2006), and further updated by Dreher et al. (2008) to proxy our globalization
measures.3 Finally, we examine the impact of political institutions on the economic
growth over China. In a word, we are able to uncover the various underpinnings of
global integration on regional economic growth in empirical model as robustness
implications for policy maker in China.
Reviewing the investigation of existing literature, globalization proxy is used to
commonly define as a strict economic practice by most previous works. Saich (2000)
indicates that while globalization has become a hot topic, the overwhelming majority of
this field habitually concentrates on “economic shapers”, with little attention paid to the
other dimensions like culture, politics or society. In a similar vein, Prempeh (2004)
demonstrates that globalization refers to the widening and deepening integration in terms
of the convergence of trade, capital, technology and information. It should be suitable
being viewed as a process not only reconstitutes international economies, but also
narrows national borders and integrates the world economy into a single system. This is
confirmed through interactions between people and direct contacts at the intergovern-
mental level which are based on well-established channels of communication. Thus,
rather than a single process, globalization is a complex process in cultural, economic,
political, social and technological effects with different dimensions (Held et al., 2000).
Why do we take into account different dimensions of globalization? Several
reasonable considerations are proposed here. As mentioned above, most of previous
Globalization, Economic Growth and Institutional Development 33
studies solely use the economic dimensions as globalizations, such as capital flows,
trade openness and foreign direct investment (FDI). On one hand, from a policy
perspective, as stated by Dreher et al. (2012), each element of economic globalization
is relevant, but cannot be simultaneously incorporated into one regression because of
the potential multicollinearity among the elements. On the other hand, omitting any
one of them would result in a biased measure of coefficients. Hence, making the use
of an aggregate measure for economic globalization, like the Konjunkturforschungs-
stelle (Business cycle research institute) (KOF) index of globalization do, is
preferable. In addition, there remain some concerns regarding to other dimensions
of globalization. For the social globalization, the recent rapid usage of the Internet
has spread new technology, combining people’s interaction with the flow of
information, thereby causing cultural convergence and sped up the globalization
process (Boockmann & Dreher, 2003; Dreher, 2006). As to the political globaliza-
tion, Simmons and Elkins (2004) identify that international policy diffusion enables a
country to liberalize its trade policy. In other words, policy choices determine how a
domestic economy engages in economic globalization. Wade (2009) also notices that
the political economy of policy reforms play an important role in global imbalances
and re-organizations. To sum up, globalization is more than a single economic
phenomenon; it also has wider political and social ramifications.
Further, as noted by Dorward et al. (2005), the importance of institutions in
economic behaviour is recognized by development economics. Previous work
commonly omits the configuration of domestic political institution may present its
influence on economic development, while governmental policy is determined for
domestic economic practice as well as political behaviour. For instance, Schulze and
Ursprung (1999) confirm that the effects of international capital market integration
depend heavily on intergovernmental political institutions; Craft (2000) also find that
many aspects of the current political institutions are shown to be unprecedented, not
only driven by a policy selection but also in combination with the promotion for
macroeconomic policy. Furthermore, Rupasingha et al. (2002) assess the contribu-
tion of social and institutional variables on income growth for counties in the USA;
they argue that institutional factors are relevant to growth. Chen and Feng (2000)
also point to the political role which the central government in China can play an
important role in improving the economic growth of inner provinces in China,
comparing with those coastal areas since the widening income gap between the two
areas would lead to political instability.
From an empirical perspective, the potential bias of existing province-specific
differences in relation to regional economic growth, and the possible simultaneity
caused by the joint determination of globalization and growth, as well as the weak
instrument problems also raise important econometric issues. In addition, it is widely
acknowledged that many key economic indicators exhibit time-varying processes
(Xiao, 2009; Lee & Zeng, 2011). The associated linkage in the relationship between
globalization and economic growth may also give rise to a time-varying dynamic
process. We thus utilize the dynamic panel generalized method of moments (GMM)
approach suggested by Arellano and Bover (1995) and Blundell and Bond (2000) to
investigate the determinants of economic growth in China with pioneers while
considering various influences from three globalization perspectives: economic,
political and social. The panel GMM method enables us to handle the dynamic
34 C.-C. Lee et al.
process of growth, with current realizations of China’s provincial growth rate

influenced by past ones. The general estimators are designed for situations with fewer
time periods and more provinces, with independent variables that are not strictly
exogenous, with fixed effects, and with heteroskedasticity and autocorrelation within
provinces. By doing so, we can reliably and accurately investigate the impact of the
exogenous component of globalization on regional economic growth in China.
To sum up, the problems mentioned above lead us to question a large part of the
existing literature. It is a pity that only a few empirical studies considering the role of
institutional development in China, combining with the descriptions of the regional
development (Ying 2008; Li & Haynes, 2011), we overcome the potential shortcom-
ing by employing sub-national data to inspect the role of political institutions in the
process at the level of globalization. As a result, we can clearly identify the
substantial appearances of a nexus among the globalization–growth for China. We
believe this will shed some light on the future governance implications for those
developing countries, in particular, countries with autocratic regime like China.4
The remainder of this paper is structured as follows. Section 2 provides a brief
summary of the literature and describes the economic history of China. Section 3
introduces the econometric model. Section 4 outlines the data, variables and
hypotheses to be tested. Section 5 summarizes the conclusions.
2. Literature Review
Previous papers often used broad indicators as globalization proxies, such as the ratio of
exports to gross domestic product (GDP), the ratio of imports to GDP, trade openness,
the ratio of FDI to GDP and inward and outward FDI, the ratio of portfolio investment
flows to GDP and black-market premium on the exchange rate, etc., as those broad-
based measures of globalization shown in Table 1. More precisely, from the dominant
liberal view, researchers lay claim to that globalization causes trade and investment
opportunities for employment, technology innovation, international economic integra-
tion, leading to higher economic growth (Frankel & Romer, 1999; Greenaway et al.,
2002; Dreher, 2006; Kim, 2008; Chang & Lee, 2011; Chang et al., 2011; Rao &
Vadlamannati, 2011). However, evidences of higher levels of globalization have adverse
effects on the domestic economy that are also discovered raised by globalization usually
increases economic and social inequalities (Vamvakidis, 2002; Jin, 2006); meanwhile,
several works find no effect of globalization on economic growth (Dutt, 1997; Tsai &
Huang, 2007; Mah, 2010). Unlike any other familiar setting, globalization is treated as
economic liberalization and economic internationalism, respectively.5 Sumner (2004)
finds that trade and capital volumes and growth are associated, but the association
between reduction in trade and capital controls and growth remains unclear. In sum,
concerning these empirical findings, the relationship between globalization and economic
growth is still disputed. Therefore, the question of whether globalization improves
growth is somewhat unresolved and needs further investigation.
China has followed a quite different path from planned economy to market economy
system after the beginning of market reform, opening and transition in 1978. Since then,
China’s market economy has achieved rapid development along with economic growth.
The bright economic performance shows that China’s GDP per capita in 2006 is 10.2
times comparing with that in 1978, at that time; the Chinese economy has maintained a
Table 1. Comparative survey of the empirical results on the relationship between globalization and economic growth
Variable of
economic
Authors Samples Variable of globalization growth Causal relationship

Dutt (1997) Cross-country analysis FDI Real per Globalization ! Growth
capita GNP
þ

Frankel and 150 countries Bilateral trade Income per Globalization ! Growth
geographic component
Romer (1999) person
þ
Vamvakidis (2002) 22 countries Trade/GDP Real per Globalization ! Growth:
capita GDP 1970–1990

Globalization ! Growth:
1920–1940
þ
Greenaway et al. (2002) 73 countries Time of a country’s first structural Real GDP Globalization ! Growth
adjustment loans from World Bank; per capita
timing of liberalization; trade policy
regimes (closed or open)
þ
Dollar and Kraay (2003) 68 countries Trade/GDP Real GDP Globalization ! Growth
institutional quality
per capita
þ
Baier et al (2004) 145 countries Opening of the stock market Per worker Globalization ! Growth
increased productivity
values of
output
þ
Read (2004) Small island states Trade/GDP (GNP) Real GDP Globalization ! Growth
per capita
þ
Li and Liu (2005) 84 countries FDI Real GDP Globalization ! Growth
per capita

Jin (2006) South Korea Imports/GDP; trade/GDP Real GDP Globalization ! Growth
þ
Dreher (2006) 123 countries KOF globalization index Real GDP Globalization ! Growth
per capita

Tsai and Huang (2007) Taiwan Inward and outward FDI Mean income Globalization ! Growth
of the poor
þ
Tuan and Ng (2007) 36 cities (counties) in Pearl FDI Industry Globalization ! Growth
River Delta and 105 cities specialization
(counties) in Yangtze River index
Delta, China
36 C.-C. Lee et al.
Table 1 (Continued)
Variable of
economic
Authors Samples Variable of globalization growth Causal relationship
þ
Kim (2008) 50 developing countries FDI Real GDP Globalization ! Growth
per worker
þ
Chakraborty and India FDI Real GDP Globalization ! Growth
Nunnenkamp (2008)
þ
Chang et al. (2009) 82 countries Trade/GDP Real GDP Globalization ! Growth
economic reforms
per capita
þ
Adams (2009) 42 Sub-Saharan Africa FDI/GDP Real GDP Globalization !
domestic investment
countries growth rate Growth
þ
Tuan et al. (2009) 23 cities in globalized delta FDI Real GDP Globalization ! Growth
economies, China

Mah (2010) China FDI Real GDP Globalization ! Growth
þ
Economic globalization !
Growth
þ
Chang and Lee (2010) 23 OECD countries KOF globalization index Real GDP Social globalization ! Growth
þ
Political globalization !
Growth
þ
Rao and 21 African countries KOF globalization index Real GDP Globalization ! Growth
Vadlamannati (2011)
þ
Anwar and Sun (2011) Malaysia FDI Real GDP Globalization !
finance development
Growth
þ
Chang and Lee (2011) 10 former communist KOF globalization index Real GDP Globalization ! Growth
countries and 18 OECD per capita
democracies
þ
Chang et al. (2011) G7 countries KOF globalization index Real GDP Overall globalization ! Growth
þ
Social globalization ! Growth
GNP, gross national products; OECD, Organization for Economic Co-operation and Development.
þ þ
Note: ! : Globalization presents the positive impacts on growth; ! : Globalization presents the positive impacts on growth under X condition; !: Globalization presents the

negative impacts on growth; !: Globalization is lack of significant impacts on growth.
9.8% average rate of annual growth rate in the past few decades. According to “BRIC
Report” published in October 2003, Goldman Sachs named China, Brazil, Russia and
India as the four countries with great development potential. Consequently, China’s
economic development has become the focus of international concerns.
Furthermore, China has increasingly influenced the economic structure of the
world in recent decades. Fidrmuc and Korhonen (2010) indicate that China has
altered the allocation of national income in the global economy. For example, the
percentage of national income in the world has improved from 1.7% in 1980 to 5.9%
in 2007. As anticipated, the percentage of its exports and imports in the world has
also significantly increased during this similar time period (Allegret & Essaadi, 2011).
In addition, the ratio of trade to GDP, which is frequently as a measure of openness,
has increased form 38.5% in 2001 to 65% in 2006 (Yao & Liu, 2012). There is no
doubt that China has promoted and contributed to intraregional trade and is
therefore plays a critically important role in the global economy, and, more
importantly, in the Asia-Pacific region.
Dozens of previous studies have argued that the economic growth of China is
remarkable since its economic reform started in the late of 1980s (Lo & Chan, 1998;
Yao, 1999; Chen & Feng, 2000; Yao & Zhang, 2001; Lu, 2005; Prasad & Rajan, 2006;
Liang, 2007; Ding & Knight, 2009; Luo, 2011). But studies on researching
globalization impact on localization growth are few, particularly based on the
provincial data; for example, Wei et al. (2001) investigate the endogenous innovation
growth theory and regional income convergence for 27 provinces across China. They
find that FDI and international trade are conducive to growth and regional per capita
income does converge. Zhao et al. (2003) discuss the impact of globalization on urban
growth by correlation analysis or estimation of empirical models using cross-sectional
data on 236 cities in China. They find that both coefficients of FDI and foreign
industrial output were positive and significant when the dependent variables are
utilized by city level products and population, respectively. Liang (2007) uses 29
provincial level data to analyse the impact of trade openness on poverty and income
growth in urban China and conclude that trade openness has a positive effect on
income growth; see also similar finding in Tuan and Ng (2007) as well as Tuan et al.
(2009) for the case of globalized delta economies as Pearl River Delta and Yangtze
River Delta. However, Mah (2010) proposes that FDI inflows have not caused
economic growth in China during the period of 1983–2001 after the economic reforms.
3. Econometric Model
A two-step system GMM technique for the dynamic panel data model was used to
estimate the cross-province regression. The system estimator was provided for a more
flexible variance-covariance structure of the moment conditions. Compared with the
conventional static panel data regression models (fixed-effect or random-effect
models), the panel GMM technique is consistent and efficient in estimating the
coefficients of equations and in solving the problems of endogeneity, heteroskedas-
ticity and autocorrelation. We strived to further the boundaries of econometric
methodologies and provide new insights of globalization on regional economic
growth in our interest and understanding which dimensions of globalization have the
most contribution to China’s provincial growth.
38 C.-C. Lee et al.
We consider the following dynamic panel regression equation that captures the
theoretical relationship between globalization and economic growth:
yi;t ¼ ayi; t1 þ b0 X i; t þ gi þ /t þ ei; t ; t ¼ 1; 2; . . . ; T ; i ¼ 1; 2; . . . ; N ; ð1Þ
where t and i denote the time period and province, respectively. gi is an unobserved
province-specific effect, /t offers time-specific effect and ei;t is the residual. Term yi;t
represents real income per capita which is a proxy for regional economic growth and
X i;t is the set of explanatory variables, including the overall index of globalization
(GLOB), three main sub-dimensions of economic (ECO), social (SOC), and political
(POL) globalization indices,6 and the growth rate of provincial gross regional
product adjusted by the retail price index (GW). The logarithms of real gross
regional product for the initial year of period (LINRGDP), the numbers of students
enrolment (regular secondary schools) divided by national population (SECENR)
and the government expenditure in per cent of GDP (GOVGDP) were also covered.
The gross fixed capital formation in per cent of GDP (INVGDP), inflation rate
(INFL) and growth rate of term of trade (GRTOT) were also measured.
The presence of province-specific effects gi causes the within-group estimators
inconsistent as gi is vitally correlated with the lagged dependent variable. By taking
the first differences of Equation (1), the province-specific effect was eliminated7:
yi;t yi;t1 ¼ aðyi;t1 yi;t2 Þ þ b0 ðX i;t X i;t1 Þ þ ð/t /t1 Þ þ ðei;t ei;t1 Þ; ð2Þ
where (yi;t yi;t1 ) is the growth rate of per capita real income. The term a, which is
the coefficient of the dependent variable yit1 , refers to the persistence of the real
income growth coefficient. If a is significantly positive, then provincial economic
growth in 1 year does persist in the following year. If a is significantly greater than 1,
then the increase of the current economic growth rate is expected to more than
double the degree of persistence increased from one year to the next. Conversely, it
will cause a controlling effect rather than persistence of economic growth, when a is
significantly negative. Therefore, the dynamic model must be used to deal with the
persistence of provincial economic growth.
Two potential econometric problems may arise from Equation (2). First, the
lagged difference of dependent variable (yi;t1 yi;t2 ) correlates with the error term
(ei;t ei;t1 ). Another problem concerns the endogeneity of the explanatory variables,
which is well recognized in the literature (Edison et al., 2002; Liang, 2007; Bergh &
Nilsson, 2014; Lee & Hsieh, 2014). Therefore, instrumental variables and the
following moment conditions are required to calculate the difference estimators:
E½yi; ts ðei;t ei; t1 Þ ¼ 0; ð3Þ
E½X i; ts ðei; t ei; t1 Þ ¼ 0; for s 2; t ¼ 3; . . . ; T : ð4Þ

To identify the parameters of Equation (3), we use the matrix of the instrumental
variables as follows8:
Z i ¼ diag ½yi; 1 ; . . . ; yi; ts ; X i; 1 ; . . . ; X i; ts for s 2; t ¼ 3; . . . ; T : ð5Þ
We also define B as the N ðT 2Þ k design matrix, where k is the number of

explanatory variables, stacked by a cross-sectional unit with the typical row of:
bi; t ¼ ½Dyi; t1 ; DX 0 i; t ; D/t : ð6Þ

1
P
N
By setting up AN ¼ N 1 Z i 0 Dêi Dê0 i Z i , the GMM estimator of the coefficient
vector is obtained: i¼1
^ 1
d ¼ ðB0 ZAN Z 0 BÞ B0 ZAN Z 0 Y ; ð7Þ
where Y is the ðT lag 1ÞN 1 vector of the stacked DY i;t dependent variables,
0
Z ¼ ½Z 0 1 ; . . . ; Z 0 N and the Dêi is obtained from a first step estimation using a
covariance matrix implied by the moving average structure of the disturbances.9
As linear GMM estimators, the estimators have one- and two-step variants
(Arellano & Bond, 1991; Blundell & Bond 1998). In the first step, the error term is
assumed to be independent and homoskedastic across provinces over time. In the
second step, the residuals obtained from the first step were used to construct a
consistent estimate of the variance-covariance matrix, thus relaxing the independence
and homoskedasticity assumptions. The two-step estimator is asymptotically more
efficient relative to the first-step estimator.
Blundell and Bond (1998) proposed the extended GMM system estimator that
combines the regression in differences with the regression in levels to overcome the
statistical shortcomings inherent in the difference estimator. The regression in
differences uses identical lagged levels of the explanatory variables as instruments
with the difference estimator. The regression in levels uses the lagged differences of
the corresponding variables as instruments under the following additional assump-
tions: (1) there is no correlation between the differences in the explanatory variables
and the province-specific error terms even though there may be a correlation between
the levels of the explanatory variables and the province-specific error terms; (2) the
error terms are not serially correlated. The additional moment conditions for the
equation in the levels are as follows:
E½Dyi; ts ðgi þ ei; t Þ ¼ 0 for s ¼ 1: ð8Þ
E½DX i; ts ðgi þ ei; t Þ ¼ 0 for s ¼ 1: ð9Þ
Consequently, according to the moment conditions in Equations (3) and (4) and
Equations (8) and (9), the GMM system panel estimator is built to generate
parameter estimates with consistency and efficiency.
40 C.-C. Lee et al.
4. Data and Empirical Results

4.1. The Basis Discovery
This paper investigates the impact of globalization on economic growth by using
panel data covering 30 provinces (including municipality) in China from 1970 to
2006.10 The dependent variable GW and five macroeconomic variables SECENR,
INVGDP, GOVGDP, INFL and GRTOT are taken from the AREMOS economic-
statistic data banks, created by the Ministry of Education in Taiwan. The main data
source of globalization is taken from KOF Index of Globalization, an index that uses
a multivariate approach to measuring globalization, including the index for
measuring three main dimensions of globalization: ECO, SOC, POL and an overall
index of globalization (GLOB). KOF globalization indices are calculated and
detailed in Dreher et al. (2008), indices range between 0 (not globalized) and 100
(globalized), higher values denote greater globalization. All detailed definitions and
source are displayed in Table 2 and Table A1 of Appendix. Table 3 presents the
Table 2. Summary of variables, descriptions and data sources
Classification Variable Description Source

Dependent GW Growth rate of gross regional AREMOS
variable product adjusted by retail price
index (1978 = 100)
Globalization GLOB Overall globalization index Dreher (2006) and
variables ECO Economic globalization index updated in Dreher
SOC Social globalization index et al. (2008)
POL Political globalization index
Controlled SECENR Number of students enrolled AREMOS
variables (regular secondary schools)
divided by national
population (%)
INVGDP Gross fixed capital formation in AREMOS
per cent of GDP (%)
GOVGDP Government expenditure in per AREMOS
cent of GDP (%)
INFL Inflation rate measured by the AREMOS
retail price index
GRTOT Growth rate of term of trade (%) AREMOS
Influential AUTOC Institutionalized autocracy. A POLITY IV
factor measure of the degree of PROJECT
autocracy in a given country based
on: (1) the competitiveness of
political participation; (2) the
regulation of political
participation; (3) the openness and
competitiveness of executive
recruitment and (4) constraints on
the chief executive. This variable
ranges from zero to ten where
higher values equal a higher
degree of institutionalized
autocracy. This variable is
calculated as the average from
1960 through 2000, or for specific
years as needed in the tables
Table 3. Correlation matrix
GW GLOB SECENR INVGDP GOVGDP INFL GRTOT

GW 1
GLOB 0.320** 1
(0.000)
SECENR 0.159** 0.408** 1
(0.000) (0.000)
INVGDP 0.332** 0.880** 0.535** 1
(0.000) (0.000) (0.000)
GOVGDP − 0.129** − 0.750** 0.124** − 0.591** 1
(0.000) (0.000) (0.000) (0.000)
INFL − 0.217** − 0.050** − 0.373** 0.070** − 0.393** 1
(0.000) (0.049) (0.000) (0.010) (0.000)
GRTOT 0.099** 0.049** − 0.115** 0.103** − 0.057** 0.359** 1
(0.001) (0.050) (0.000) (0.000) (0.029) (0.000)
Note: ** indicates that the correlation coefficients are significant at the 5% level. P values denote the significant
level of each correlation coefficient in parentheses.
correlation matrix of the explanatory variables. As shown, the highest correlation

coefficient between GLOB and INVGDP is 0.880, while the lowest is 0.049 between
GLOB and GRTOT. The remaining correlation coefficients are around −0.217 to
0.408, all of which are acceptable when it comes to avoiding the problem of
multicollinearity.
The literature has widely accepted that regional inequality is an important issue
worth a deep discussion (Hu, 2002; ten Raa & Pan, 2005; Naudé & Krugell, 2006;
Jeon & Yoo, 2009). In this regard, Zhang and Zhang (2003) provide empirical
evidence on globalization and regional inequality by using a panel data-set at the
provincial level in China. They conclude that globalization through foreign trade and
FDI exerts crucial influence on widened regional inequality. Saith (2011) also notes
that globalization has been accompanied by rising inequality within the countries such
as China and the USA. This study classifies the 30 provinces/municipality into three
regions based on their geographical locations, with 10 from the Eastern, 9 from the
Central and 11 locate at Western areas. The 30 selected provinces are listed in Table 4.
Table 4. List of 30 China provinces/municipality classified into three regional groups
East (10 provinces) Central (9 provinces) West (11 provinces)

Beijing (municipality) Shanxi Guangxi
Tianjin (municipality) Inner Mongolia Chongqing (municipality)
Hebei Jilin Guizhou
Liaoning Heilongjiang Yunnan
Shanghai (municipality) Anhui Tibet
Jiangsu Jiangxi Shaanxi
Zhejiang Henan Gansu
Fujian Hubei Qinghai
Shandong Hunan Ningxia
Guangdong Xinjiang
Sichuan
42 C.-C. Lee et al.
Table 5 represents the estimated results from the two-step system GMM technique
on the relationship between growth and globalization for all samples. As discussed by
Dreher (2006), because most dimensions of globalization are closely related to each
other, it may induce collinearity problems and also lead to misleading indication of
each individual effect on growth. Therefore, there are four empirical specifications
with different globalization variables as GLOB, ECO, SOC and POL, respectively.
The first column presents the results for the overall index of globalization (GLOB),
whereas columns 2–4 investigate the effects of separated estimation for each single
component of ECO, SOC and POL. From Table 5, GLOB, ECO and POL are
statistically insignificant at the 5% level, whereas SOC is negatively and statistically
significant, suggesting that a one percentage point increase in the variable will
decrease the growth rate nearly 0.26 percentage point. Our finding is consistent with
Mah (2010), who discovers that FDI inflows have not caused economic growth, but
the rapid economic growth of China attracted foreign capital inflow, which is
intuitively plausible in the sense that, export promotion as well as guaranteeing
private property rights and smooth transition might have been more important in
explaining rapid economic growth of China.
De Mello (1999) and Edison et al. (2002) who show that globalization indeed
contributes to economic growth in cross-country analysis and vice versa, whereas an
unclear influence is found in the case of China. It is conceivable for such a big
transition economy because of its specific political, social and economic situations,
especially economic reforms, regional inequality and political autocracy. However,
our findings are not isolated as Grilli and Milesi-Ferretti (1995) and Kraay (2003)
also find unclear linkage between capital account openness and economic growth,
while Garrett (2001) shows that there is a negative connection with growth in low-
income countries. This implies that social integration plays an important role in the
economic performance for China.
The coefficients of GW(-1) are positive with significance of approximately 0.128–
0.154 in all models, showing that while current growth rates should be influenced by
past experiences, in other word, when provinces with a well economic performance in
the past are likely to continue to have well ones in the future. The coefficients of
INVGDP and GRTOT are significantly positive in all models, reflecting that
investment and growth rate of terms of trade are beneficial to growth, combing with
higher school enrolment also leads to higher growth. The coefficients of GOVGDP
and INFL, however, are overwhelmingly negative, meaning that the government
consumption and inflation rate are harmful to economic growth. Finally, the results
of the Sargan (1958, 1988) test, when applied to ensure the consistency and efficiency
of the GMM estimator, are shown at the bottom of Table 5. The Sargan test of over-
identifying restrictions involves investigating the null hypothesis that the used
instruments are not correlated with the residuals. This reveals that the test fails to
reject the null hypothesis, which further supports our results.
It is worth noting that regional inequality in China has been intuitively accepted as
an accomplished phenomenon which is commonly known as a priori, this disparity
can be linked to the available stocks of physical, human and financial capital,
economic infrastructure, legal environment and the different characteristics of the
economic, social and political environment. Therefore, the regional effect has been
widely discussed and even becomes one of the key topics in the currently existing
Table 5. Results for the dynamic panel regression of regional economic growth and globalization: full samples (1970–2006)

1 2 3 4
GW(-1) 0.154** (5.849) 0.133** (7.543) 0.132** (4.267) 0.128** (6.376)
GLOB − 0.802 (− 1.142)
ECO − 0.145 (− 0.985)
SOC − 0.256** (− 5.958)
POL − 0.155 (− 1.595)
SECENR 0.645 (1.305) 0.116 (0.450) 0.225 (0.638) 0.050 (0.785)
INVGDP 0.895** (4.664) 0.697** (8.855) 0.767** (6.898) 0.666** (5.265)
GOVGDP − 0.413** (− 2.896) − 0.377** (− 2.818) − 0.410** (− 5.137) − 0.342** (− 2.524)
INFL − 0.220 (− 0.412) − 0.451 (− 1.220) − 0.631** (− 14.088) − 0.319 (− 0.761)
GRTOT 0.109** (5.857) 0.089** (6.841) 0.097** (8.172) 0.098** (5.911)
Number of observations 1050 1050 1050 1050
Sargan test (p value) 0.186 0.165 0.435 0.149
Note: The dependent variable is provincial economic growth rate. Definitions of variables are the same as in Table 1. The t values are in parenthesis. All equations include time
dummies as regressors and instruments. The coefficients of all time dummies have been omitted. All available lags of explanatory variables are used as instruments, which
guarantee maximum efficiency. Sargan test: the null hypothesis is that the use of instruments is not correlated with the residuals. ** and * indicate that the estimated coefficients
are significant at the 5% and 10% levels, respectively.
44 C.-C. Lee et al.
literature. Tables 6–8 thus further provide the estimated results for three regional
panels (Eastern, Central and Western). Our main finding is that all the impacts of
globalization variables on economic growth are found to be overwhelmingly
negative, as it can be seen from Table 6, the variables GLOB, ECO and SOC are
negative and statistically significant at the 5% level in the Eastern region. The
negative output effect of increasing openness appears to be consistent with Jin (2006)
in the case of South Korea. For the Central region, the results in Table 7 indicate
that only the coefficient of SOC has a significantly negative sign. In Western region,
both GLOB and SOC have a significantly negative impact on growth at least at the
10% level, as shown in Table 8. In short, these evidences show that the coefficients of
globalization are range from −0.273 to −0.850.
In particular, one widely accepted prediction is that the growth effects of
globalization are contingent upon its absorptive capacity, while some mixed
evidences are reported in accordance with previous finding. Globalization in
developing countries like China frequently incurs a negative shock to domestic
economies. This finding is consistent with that of Alesina et al. (1994) who find FDI
shows evidence of a positive growth effect in countries which are sufficiently rich
(Dreher, 2006; Chang et al., 2011) and a negative one in lower income countries.
Chanda (2001) even points out that developing countries are more likely to suffer
from globalization than not. How does globalization adversely affect growth within a
developing country? Stiglitz (2004) identifies eight channels including the dilemma of
job creation, the increased risk from mismanaged globalization, the influence of
capital flows, the facilitation of capital fight, the loss of independence of monetary
policy, the loss of national financial institutions, and the effects of political and social
capital, through which globalizations have adverse effects. These explain why a
negative impact exists between globalization and growth.
Our results present clear negative influence of globalization on the growth in
Eastern region, but such impacts will descend gradually as those cases of Central as
well as Western regions. One possible explanation for the failure to find a positive
relationship is that globalization affects the regional economic growth through many
channels that naturally offset each other. Although globalization is expected to
highlight a positive effect on growth, it may also give rise to more competition for
domestic firms. In the case of Russia, for example, Seliger (2004) argues that foreign
competition leads to a decrease in domestic production. Weak finance and service
sectors in China are still facing many uncertainties and challenges in the process of
globalization. Some economists believe that China is not ready to face foreign
competition which is likely to cause ill-equipped enterprises to experience losses. The
domestic companies in agricultural sector, for example, are soon facing an
increasingly competitive challenge from large and modern foreign enterprises.
Banking and telecommunication firms also lose their monopolies (Ching et al., 2011).
In addition, removing trade barriers and increasing openness may induce a
comparative disadvantage in domestic markets, thereby resulting in harming
resource allocation and economic activities (Eichengreen, 2001). Specifically, trade
liberalization or increased openness reduces the import price of foreign goods, and
then leads to domestic goods less attractive. Finally, domestic economy may suffer
from economic disadvantages and losses (Jin, 2006). In this vein, the more globally
integrated provinces are, i.e. Eastern regions, the greater the competition, and the
Table 6. Results for the dynamic panel regression of regional economic growth and globalization: Eastern region (1970–2006)

1 2 3 4
GW(-1) 0.436 (1.615) 0.406 (1.593) 0.455 (1.609) 0.463 (1.621)
GLOB − 0.728** (− 4.126)
ECO − 0.850** (− 5.003)
SOC − 0.273** (− 2.183)
POL − 0.201 (− 1.300)
SECENR 0.844 (1.156) 1.197* (1.683) 0.517 (0.726) 0.473 (0.673)
INVGDP 1.501** (8.813) 1.508** (10.754) 1.315** (7.745) 1.383** (6.601)
GOVGDP − 0.725* (− 1.768) − 0.667* (− 1.763) − 0.541 (− 1.464) − 0.693 (− 1.557)
INFL − 1.018** (− 5.513) − 0.814** (− 5.445) − 0.954** (− 5.072) − 0.995** (− 4.334)
GRTOT 0.091** (4.033) 0.073** (3.697) 0.083** (3.796) 0.091** (3.322)
Note: Same as Table 5. The t values are in parenthesis. ** and * indicate that the estimated coefficients are significant at the 5% and 10% levels, respectively.
46 C.-C. Lee et al.
Table 7. Results for the dynamic panel regression of regional economic growth and globalization: Central region (1970–2006)
1 2 3 4
GW(-1) − 0.259** (− 3.439) − 0.260** (− 3.652) − 0.265** (− 3.437) − 0.288** (− 3.278)
GLOB − 0.150 (− 0.819)
ECO − 0.082 (− 0.351)
SOC − 0.353** (− 4.232)
POL 0.136 (1.126)
SECENR − 0.082 (− 0.182) − 0.099 (− 0.188) − 0.023 (− 0.055) − 0.240 (− 0.573)
INVGDP 1.146** (6.776) 1.121** (6.758) 1.171** (7.068) 1.021** (5.406)
GOVGDP 0.150 (0.619) 0.175 (0.735) 0.158 (0.744) 0.282 (1.002)
INFL − 0.584** (− 5.252) − 0.549** (− 7.963) − 0.641** (− 8.061) − 0.481** (− 3.519)
GRTOT 0.073** (4.845) 0.070** (5.859) 0.076** (6.109) 0.062** (3.361)
Table 8. Results for the dynamic panel regression of regional economic growth and globalization: Western region (1970–2006)

1 2 3 4
GW(-1) 0.233 (0.726) 0.211 (0.667) 0.237 (0.741) 0.234 (0.728)
GLOB − 0.311* (− 1.928)
ECO 0.053 (0.381)
SOC − 0.684** (− 4.323)
POL 0.064 (0.472)
SECENR 1.173 (1.588) 0.948 (1.360) 1.637** (2.265) 0.946 (1.354)
INVGDP 0.673** (2.021) 0.563 (1.605) 0.761** (2.152) 0.536* (1.727)
GOVGDP − 0.605 (− 1.211) − 0.525 (− 1.093) − 0.621 (− 1.300) − 0.488 (− 0.900)
INFL − 0.849** (− 6.224) − 0.776** (− 6.065) − 0.748** (− 6.051) − 0.756** (− 4.419)
GRTOT 0.117** (3.392) 0.115** (3.282) 0.107** (3.168) 0.108** (2.845)
48 C.-C. Lee et al.
more likely the negative impact on the growth of domestic products. In addition, the
wave of globalization is inevitably accompanied by higher degree of risk exposure. It
is expected that countries with greater exposure to openness are more vulnerable to
international shocks (Rodrik, 1998; Kimakova, 2009; Wu & Lin, 2012). Although
China has experienced rapid economic growth, its financial sector is still under-
developed (Chang et al., 2010; Zhang et al., 2012). Firms in such an integrated and
interconnected market as the Eastern regions are more likely to be exposed to global
economic shocks, which may bring reverse effects on growth.
Economists believe the force of globalization as a “double-edged sword”, meaning
that there are both positive and negative impacts for international economy entering
the global stage (Alesina et al., 1994; Stiglitz, 2004). However, as the arguments of
Mah (2013), China has attracted a huge amount of FDI and rapid expansion of
international trade values in the past decades. Hence, together with the progress of
globalization, Chinese government has gradually pursued policy by developing the
Special Economic Zones (SEZs), which are mostly located at the Eastern region of
China, due to the lack of infrastructure and capital stock. This induces a rapid
development accompanied by FDI inflows and exports have gradually propagated to
the neighbouring provinces, combing with a significant rise in income inequality has
been observed in China, not only among SEZs and non-SEZs, but also between the
coastal and the interior provinces. Since significant deterioration of the income
inequality situation can be regarded as a serious social problem, then potential
linking to the negative shocks in economic growth, especially in the region of Eastern
China (Zhang and Zhang, 2003).
To sum up, although these conclusions are very sensitive to regional sample and
different globalization variable, the negative globalization–growth nexus still remains
not only for Eastern region but also for most of our empirical results in Tables 5–8;
even after taking the institutional factors into consideration in Tables 10–13 (as
shown later), we also discover some adverse effects in most cases. Compared with
previous wisdoms, our empirical results provide an alternative disclosure that
globalization has serious side-effects and adversely affect growth in China.
Finally, the persistence coefficients of GW(-1) are negatively significant in all
equations in the Central region and insignificant in Western, showing that negative
shock may persist from past influences in this region. A reasonable explanation for
the result may be that the East has a higher economic growth rate than the Central
and Western regions, the regional gap between the East and the others has been
broadened since it began economic reforms (Zhang et al., 2001).
4.2. Further Evidences for Institutional Factor

Democracy and autocracy have several essential institutional differences. Linz (2000)
argues that democracy is the political system which allows free elections of the
executive and legislative institutions; it also keeps the right of citizens to vote and an
independent judiciary. In contrast, autocracy does not allow fair elections often
associated with the existence of a powerful leader or with weak political mobilization.
These fundamental institutional inconsistence arise different behaviours among the
two regime types. In general, Olson (1993) mentions that the office tenure in
autocracy is likely to be much stronger, given this logic, autocratic governments have
been secured in power with a longer time, it cause they less likely to attract FDI for
short-term gains.
From economic aspect, economic history teaches us that democracies tend to
outperform authoritarian regimes (Fidrmuc, 2003), it usually explained by that
democracy ensures that property rights are guaranteed and a necessary precondition
for sustained long-term growth (North, 1990). Accordingly, democratic governments
have a greater encompassing interest in the economy’s development than authorit-
arian one (Olson, 1993); Rodrik (2000) argues that democracy leads to higher growth
because it lowers economic uncertainty. However, theory suggests that democratic
institutions may be harmful to growth, since democracy often undermines investment
because democracy leads to pressures for immediate consumption, resulting in
reduced investment and steady-state income and possibly growth (Butkiewicz &
Yanikkaya, 2006).
The empirical evidence is also mixed. Minier (1998) finds that the countries that
democratized subsequently grow faster than similar countries that shied away from
democratization. In contrast, empirical studies suggest the relationship is negative
(De Haan & Siermann, 1995; Barro, 1996). Different from the aforementioned
studies, Decker and Lim (2008) find no evidence that democracies grow faster or
slower than non-democracies do. They further point out that growth-enhancing
effects of democracy are conditional on economic integration, which is measured by
the degree of openness to trade. Minier (2007) also finds similar results that
institutions do matter for trade policy. While China is autocracy but remain a
sustained impressive rates of growth via implemented dramatic economic reforms, in
other words, economic development seems to require a strong hand from above. We
thus include the variable of autocracy (AUTOC) to further investigate the
institutional issue on economic growth in China. Data of autocracy is borrowed
from the “POLITY IV PROJECT”, variable ranges from zero to ten where higher
value represents a higher degree of institutionalized autocracy.
Table 9 presents the estimated results when the institutionalized autocracy
“AUTOC” is included to the growth regression. The column 1 gives evidence on
the significantly negative impacts of institutionalized autocracy on growth without
considering globalization, reflecting the autocratic institution harms the economic
performance in China reassembly, columns 2–5 provide mixed results when including
globalization variables. For both specifications 3 and 5, the estimates imply that the
autocracy has no effect on regional economic growth. The results suggest that
institutionalized autocracy has unclear effect on economic growth. Next, comparing
with Table 5 result which excludes variable of AUTOC, most globalization variables
still appear to be significantly associated with lower economic growth in all sample
cases. Again, the negative output effect of increasing openness is considered to
increase international competition which may cause domestic investment shrink then
harms economic development (Jin, 2006).
In order to determine the role of institutionalized autocracy variable under the
relationship between globalization and economic growth, we thus conduct the
extended model with the interactive term as follows:
50 C.-C. Lee et al.
Table 9. Regional economic growth and institutionalized autocracy for all samples
1 2 3 4 5
GW(-1) 0.088** (3.755) 0.129** (4.273) 0.046** (3.049) 0.022 (0.163) 0.042** (2.727)
AUTOC −3.921** (−6.162) −3.039** (−3.779) −0.144 (−0.194) 2.268** (3.366) −0.381 (−0.542)
GLOB −0.604 (−0.824)
ECO −0.332** (−6.215)
SOC −0.466** (−2.183)
POL −0.304** (−3.914)
SECENR −1.035** (−3.873) −0.273 (−0.571) −0.398** (−2.342) 0.062 (0.374) −0.537** (−2.875)
INVGDP 0.636** (9.390) 0.897** (4.245) 0.779** (6.663) 0.747** (6.242) 0.751** (5.893)
GOVGDP 0.106 (0.807) −0.191 (−1.376) 0.088 (1.622) 0.077 (1.308) −0.043 (−0.652)
INFL −0.333 (−0.826) −0.196 (−0.346) −0.365** (−3.235) −0.565** (−5.162) −0.500** (−5.028)
GRTOT 0.071** (4.633) 0.097** (4.617) 0.064** (9.130) 0.075** (11.283) 0.089** (10.418)
Number of observations 1050 1050 1050 1050 1050
Sargan test (p value) 0.163 0.178 0.201 0.195 0.228
Table 10. Regional economic growth and globalization for all samples: institutionalized autocracy

1 2 3 4
GW(-1) 0.126** (4.152) 0.094** (3.151) 0.117** (3.539) 0.097** (3.026)
GLOB 0.642 (0.934)
GLOB × AUTOC −0.175** (−4.612)
ECO −33.866 (−0.563)
ECO × AUTOC 10.652** (10.574)
SOC 1.464** (2.898)
SOC × AUTOC −0.238** (−3.312)
POL 0.540 (1.270)
POL × AUTOC −0.096** (−2.945)
SECENR −0.295 (−0.619) 4.205 (0.500) −0.282 (−0.765) −0.752 (−1.545)
INVGDP 0.900** (4.292) −1.533 (−0.392) 0.792** (6.891) 0.794** (3.545)
GOVGDP −0.186 (−1.342) −4.537 (−0.596) −0.250** (−2.812) 0.003 (0.446)
INFL −0.205 (−0.365) −9.716 (−0.609) −0.617** (−13.397) −0.073 (−0.131)
GRTOT 0.097** (4.597) 0.252 (0.852) 0.092** (7.238) 0.086** (3.673)
52 C.-C. Lee et al.
Table 11. Regional economic growth and globalization for the Eastern region: institutionalized autocracy
1 2 3 4
GW(-1) 0.523** (2.319) 0.502** (2.291) 0.521** (2.458) 0.540** (2.285)
GLOB −5.777** (−4.207)
GLOB × AUTOC 0.741** (3.580)
ECO −5.487** (−3.736)
ECO × AUTOC 0.697** (3.222)
SOC −14.723** (−4.749)
SOC × AUTOC 1.894** (4.301)
POL −2.845** (−4.326)
POL × AUTOC 0.385** (3.756)
SECENR 3.199** (4.388) 3.146** (4.385) 3.908** (4.524) 2.975** (4.416)
INVGDP 1.283** (7.051) 1.286** (8.980) 1.362** (9.012) 1.172** (5.237)
GOVGDP −0.891** (−2.237) −0.831** (−2.294) −0.933** (−2.462) −0.843** (−2.069)
INFL −1.018** (−6.122) −0.863** (−6.362) −1.269** (−6.521) −0.989** (−4.674)
GRTOT 0.086** (3.667) 0.073** (3.518) 0.099** (4.174) 0.085** (2.982)
Table 12. Regional economic growth and globalization for the Central region: institutionalized autocracy

1 2 3 4
GW(-1) −0.144 (−1.536) −0.123 (−1.422) −0.141 (−1.463) −0.160 (−1.606)
GLOB −4.803** (−3.213)
GLOB × AUTOC 0.682** (3.491)
ECO −5.327** (−3.845)
ECO × AUTOC 0.786** (4.404)
SOC −11.252** (−3.604)
SOC × AUTOC 1.548** (3.492)
POL −2.178** (−2.713)
POL × AUTOC 0.335** (3.230)
SECENR 2.152** (2.147) 2.176** (2.184) 2.423** (2.498) 2.013** (2.053)
INVGDP 0.887** (5.376) 0.811** (4.997) 0.957** (5.447) 0.784** (4.225)
GOVGDP −0.069 (−0.253) −0.076 (−0.290) −0.128 (−0.527) 0.078 (0.247)
INFL −0.588** (−4.921) −0.601** (−7.124) −0.690** (−7.121) −0.486** (−3.395)
GRTOT 0.070** (4.306) 0.072** (5.148) 0.077** (5.385) 0.059** (3.002)
54 C.-C. Lee et al.
Table 13. Regional economic growth and globalization for the Western region: institutionalized autocracy
1 2 3 4
GW(-1) 0.261 (0.878) 0.254 (0.861) 0.266 (0.899) 0.251 (0.842)
GLOB −6.805** (−4.360)
GLOB × AUTOC 0.959** (4.509)
ECO −7.021** (−4.331)
ECO × AUTOC 0.963** (4.168)
SOC −14.979** (−4.231)
SOC × AUTOC 2.131** (4.331)
POL −3.207** (−4.117)
POL × AUTOC 0.477** (4.484)
SECENR 4.086** (3.671) 4.156** (3.847) 4.128** (3.626) 3.952** (3.642)
INVGDP 0.422 (1.273) 0.488 (1.364) 0.409 (1.168) 0.305 (0.973)
GOVGDP −0.715 (−1.551) −0.744* (−1.681) −0.725* (−1.648) −0.574 (−1.122)
INFL −0.783** (−5.814) −0.753** (−6.222) −0.786** (−6.118) −0.691** (−4.069)
GRTOT 0.111** (3.221) 0.108** (3.253) 0.111** (3.306) 0.101** (2.637)
yi; t ¼ ayi; t1 þ c1 xi; t þ c2 ½xi;t AUTOCi;t þ b0 X0 i; t þ gi þ ut þ ei;t ; ð10Þ
where xi;t is the level of our observed variables (including GLOB, ECO, SOC and
POL, respectively) and X i;t is the set of all explanatory variables. This equation uses
the same specifications as those in Equation (1), but adds an interactive variable
between globalization and the institutionalized autocracy. Our conditional hypo-
theses centre around the coefficients c1 and c2 . Based on estimated parameters, we
categorized four possibilities as follows.
(1) If c1 > 0 and c2 > 0, then globalization has a positive impact on economic
growth, and the institutional factors further enhance that positive impact.
(2) If c1 > 0 and c2 < 0, then globalization has a positive impact on growth, but
the institutional factors detract from that positive impact.
(3) If c1 < 0 and c2 > 0, then globalization has a negative impact on economic
growth, and the institutional factors alleviate that negative impact.
(4) If c1 < 0 and c2 < 0, then globalization has a negative impact on economic
growth, but the institutional factors aggravate that negative impact.
In short, the c1 coefficient indicates the direct effect of globalization, whereas ðc

AUTOCÞ represents the indirect effect and ðb þ c AUTOCÞ is the total effect,
respectively. In other words, the final influential effect of globalization on economic
growth can be confirmed although only through the direction of the total effect.
In Tables 10–13, the extended models present the estimated results when the
interaction terms of the globalization and institutionalized autocracy variables are
jointed. Broadly speaking, Table 10 for the whole samples, comparing with Table 5,
firstly, the coefficient (1.464) of SOC shifts to positive significantly while we consider
the institutionalized autocracy variable as AUTOC. Secondly, GLOB × AUTOC is
negative and statistically significant, implying that the greater autocracy in China
will harm economic growth via overall globalization. In addition, the higher
integration of social and political dimensions will result in a decrease in economic
growth with higher political autocracy in China. Thirdly, ECO × AUTOC, its
coefficient has the predicted sign and is highly significant. In fact, it is strongly
supported that greater integration into the world economy consistently contributes to
China’s economic growth under the indirect impact of autocracy.
Furthermore, the results for the three cross-region analysis are provided in Tables
11–13. Interestingly, as our earlier findings, the estimation results are supportive of
all cases (overall globalization and three sub-dimension globalizations). The
coefficients of variables are still keeping significantly negative at the 5% level in all
equations, suggesting that higher degree of global integration is associated with lower
economic growth in all regions. This finding is consistent with Borensztein et al.
(1998) and Garrett (2001), who argue that capital flows make a negative contribution
to economic growth in countries with a low level of human capital, as well as higher
income countries, respectively.
Whereas those of the interaction terms are all become significantly positive when
institutionalized autocracy variables are considered in the three region panels, the
potential reason may raise from the implemented dramatic economic reforms in
56 C.-C. Lee et al.
China (Fidrmuc, 2003). It is also in line with Intrilligator (1998), who argues that
democracy is clearly not a necessary condition for high growth as the examples of
China. More specifically, higher degree of autocratic institution contributes to an
increase in the economic growth with higher degree of globalization; it also suggests
that while an increase in the level of globalization decreases growth, this negative
effect will be mitigated by a higher level of institutionalized autocracy. This supports
the view that institutionalized autocracy is critical in affecting the relationship
between globalization and economic growth. In other words, the previous literature
without considering institutional factors may afraid to identify the wrong role of the
institutions when one investigating the relationship between globalization and
economic growth in China.
Since market economy reforms were inaugurated in 1979 in China, generally
speaking, the most influential adjustments of these include the establishment of a
private market structure. The reforms have experienced an economic miracle of rapid
economic growth in the recent decades (Zheng et al., 2010). As Butkiewicz and
Yanikkaya (2006) point out, structural and economic reforms promoting long-run
growth usually cannot be undertaken in the democratic politics as those experiences
of a handful of economies in East Asia with authoritarian regimes. While economic
development requires a strong hand, the authoritarian institution in China provides a
stable and conducive macroeconomic environment to sustainable regional growth.
Finally, the control macroeconomic variables SECENR, INVGDP, GOVGDP,
INFL and GRTOT, as it can be seen, all results are consistent with the predictions of
growth theory and the finding of precious wisdom, and the Sargan tests demonstrate
the instrumental variables we use are valid. The dynamic panel model is a reasonably
good specification for the Chinese provincial level data.
For the result comparisons in different region panels, the parameters (GLOB ×
AUTOC), (ECO × AUTOC), (SOC × AUTOC) and (POL × AUTOC) in the
Western region are larger than those in the Central or Eastern regions, which clearly
indicate that globalization has a larger indirect impact on regional economic growth
in the Western, though all the indirect effects of GLOB, ECO, SOC and POL on
economic growth are negative with significant statistics. Chen and Feng (2000)
proposed that domestic reform accelerated growth is not only in the coastal provinces
(Eastern region) but also in the inner region (the Central or Western regions), which
suggests that the reforms generated across the board economic growth in China. In
accordance with our findings, we believe that the regional gap between the West and
the other regions will converge since we take into account the overall global market
and how the main sub-dimensions influence the empirical model under the autocratic
regime.
5. Concluding Remarks and Implications

Previous literatures researched on economic development in China usually ignore the
potential connections among globalization, provincial growth and institutional
factors. This paper thus examines such links using panel data for 30 provinces/
municipalities in China which cover the period from 1970 to 2006. Our focus is not
only on the globalization–growth nexus, but also investigates whether institutional
factors affect regional economic growth in China under the globalization’s shock
with utilizing the panel two-step system GMM technique.
In the case of whole samples, GLOB, ECO and POL show weakly impact on
economic growth in China, except for the SOC which presents the significant
negative shock. Next, for the results in different regional panels, in sum, SOC
presents the significantly negative influence on growth in all three cases; higher
GLOB induces lower economic growth in Eastern and Western, while ECO shows its
negative shock only in Eastern. However, POL appears to be insignificantly
associated with growth in all regions. As a result, our findings show that different
globalization indices have different impacts on regional economic growth. Thus, if
the China government attempts to promote regional economic development via
strong the global integration, the policy-makers should realize that using a single
dimension to proxy globalization may induce a fundamentally wrong policy.
However, when AUTOC is incorporated in the globalization–growth nexus,
firstly, considering the direct effects as in Table 9, though evidence shows that
AUTOC may harm regional development, but we find that these conclusions are
very sensitive to different globalization variables specifications. Secondly, for the
interactive effects investigations when AUTOC interact with all globalization
variables, as Tables 11–13, are that the effects of all aspects of globalization become
significantly negative, whereas those coefficients of interactive variables are
significantly positive, meaning that in the period of higher and quick global
integration, the higher democracy (lower autocracy) may harm economic growth in
the case of China. It implies that it would not be necessary for the China government
to provide various types of policy to cater the trend of globalization, while many
empirical results show that FDI inflows have not caused real economic growth in
China (Mah, 2010). How to keep the efficient and strong reforms continue under the
regime of autocracy is the main target of China government to achieve economic
growth, since democracy is clearly not a necessary condition for country with high
growth performance like China (Fidrmuc, 2003). Thus, the clear evidences highlight
the contributions of globalization on regional development under the autocratic
regime in China; China government should further take the institutional factors into
consideration. We provide very interesting and important implications here.
Acknowledgements
We thank the editor and two anonymous referees for their helpful comments and suggestions.
An earlier version of this paper was completed while Chun-Ping Chang was a visiting fellow at
the School of Economics and Finance, Xi’an Jiaotong University, he thanks the warm
reception of Dean Feng. Chun-Ping Chang is grateful to the National Science Council of
Taiwan for financial support through grant NSC [100-2410-H-158-003]. All remaining errors
are our own.
Notes
1. Dollar and Kraay (2003) conclude that countries with better institutions have a faster growing trade
volume. However, most previous studies show that institution influences significantly on economic
growth using cross-country data-set; but it is difficult to explain the variety in cultural norms, historical
experiences and institutional contexts (Hasan et al., 2009).
58 C.-C. Lee et al.
2. One thing worth noting is that using panel data creates another problem in which different provinces in
China as a whole are treated as an entity instead of a separate unit.
3. Dreher et al. (2008) construct an index of globalization covering three main dimensions: economic,
social and political integrations with the advantage of a very comprehensive measure to obtain an
aggregate measure of globalization, updated every year with dates back to 1970 and covers over
hundreds of countries (Rao & Vadlamannati, 2011).
4. Prasad (2009) demonstrates that there are a number of factors that could trigger unfavourable
economic dynamics in China even if they do not rise to the level of a crisis, they could have serious
adverse repercussions on growth and welfare.
5. According to Sumner (2004), the economic liberalization is a process of opening and a policy input or
series of policy changes enacted by government, while the economic internationalism is a policy
output, an outcome of openness, over which governments have no direct control.
6. Since the provincial-level globalization index is still lacking, the country-level globalization index is
applied, which implicitly assumes that the role of globalization is fixed over provinces, but varied over
time. We believe that such setup is suitable as the discussions of presidential “coattail effect” in those
political cycles paper in the USA, to measure that a popular president spill his “coattails” to bring out
supporters who then vote for his party’s candidates for other offices, in particular in state-wide
election. Several papers thus adopt a national-wide dummy variable to refer to this coattails
phenomenon, see for examples as Samuels (2000) and Golder (2006).
7. For excellent discussions of the dynamic panel method, see the interesting textbooks of Baltagi (2008)
and Arellano (2003).
8. The instruments are lagged levels for differences and lagged differences for levels. Typically, all
available lags are used as instruments, which guarantee maximum efficiency.
9. We employ the finite-sample correction derived by Windmeijer (2005) to these standard errors in order
to evaluate the precision of the two-step estimators for hypothesis tests.
10. We select year 1970 as the beginning year because KOF data are available from that year.
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Appendix
Table A1. Components of KOF index of globalization
A. Economic globalization
(i) Data on actual flows
Trade (per cent of GDP)
FDI, flows (per cent of GDP)
FDI, stocks (per cent of GDP)
Portfolio investment (per cent of GDP)
Income payments to foreign nationals (per cent of GDP)
(ii) Data on restrictions
Hidden import barriers
Mean tariff rate
Taxes on international trade (per cent of current revenue)
Capital account restrictions
B. Social globalization
(i) Data on personal contacts
Telephone traffic Transfers (per cent of GDP)
International tourism
Foreign population (per cent of total population)
International letters (per capita)
(ii) Data on information flow Internet users (per 1000 people)
Television (per 1000 people)
Trade in newspapers (per cent of GDP)
(iii) Data on cultural proximity
Number of McDonald’s restaurants (per capita)
Number of Ikeas (per capita)
Trade in books (per cent of GDP)
C. Political globalization
Embassies in country
Membership in international organizations
Participation in UN security council missions
International treaties
Source: Constructed by Dreher (2006) and updated in Dreher et al. (2008).

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Global Economic Review

Perspectives on East Asian Economies and Industries

ISSN: 1226-508X (Print) 1744-3873 (Online) Journal homepage: https://www.tandfonline.com/loi/rger20

Globalization, Economic Growth and Institutional

Chien-Chiang Lee, Chi-Chuan Lee & Chun-Ping Chang

To link to this article: https://doi.org/10.1080/1226508X.2015.1011777

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Globalization, Economic Growth and

KEY WORDS: Globalization; economic growth; institutionalized autocracy; China

JEL CLASSIFICATION: F59, O53, C33

Correspondence Address: Chun-Ping Chang, Department of Marketing Management, Shih Chien

© 2015 Institute of East and West Studies, Yonsei University, Seoul

changes focused on reduction or elimination of trade and entry barriers as well as

process of growth, with current realizations of China’s provincial growth rate

Globalization, Economic Growth and Institutional Development 35

yi;t ¼ ayi; t1 þ b0 X i; t þ gi þ /t þ ei; t ; t ¼ 1; 2; . . . ; T ; i ¼ 1; 2; . . . ; N ; ð1Þ

E½yi; ts ðei;t ei; t1 Þ ¼ 0; ð3Þ

E½X i; ts ðei; t ei; t1 Þ ¼ 0; for s  2; t ¼ 3; . . . ; T : ð4Þ

Z i ¼ diag ½yi; 1 ; . . . ; yi; ts ; X i; 1 ; . . . ; X i; ts  for s  2; t ¼ 3; . . . ; T : ð5Þ

We also define B as the N ðT 2Þ k design matrix, where k is the number of

bi; t ¼ ½Dyi; t1 ; DX 0 i; t ; D/t : ð6Þ

E½Dyi; ts ðgi þ ei; t Þ ¼ 0 for s ¼ 1: ð8Þ

E½DX i; ts ðgi þ ei; t Þ ¼ 0 for s ¼ 1: ð9Þ

4. Data and Empirical Results

Table 2. Summary of variables, descriptions and data sources

Classification Variable Description Source

Table 3. Correlation matrix

GW GLOB SECENR INVGDP GOVGDP INFL GRTOT

correlation matrix of the explanatory variables. As shown, the highest correlation

Table 4. List of 30 China provinces/municipality classified into three regional groups

East (10 provinces) Central (9 provinces) West (11 provinces)

Globalization, Economic Growth and Institutional Development 43

Globalization, Economic Growth and Institutional Development 45

Globalization, Economic Growth and Institutional Development 47

4.2. Further Evidences for Institutional Factor

Globalization, Economic Growth and Institutional Development 51

Globalization, Economic Growth and Institutional Development 53

yi; t ¼ ayi; t1 þ c1 xi; t þ c2 ½xi;t AUTOCi;t  þ b0 X0 i; t þ gi þ ut þ ei;t ; ð10Þ

In short, the c1 coefficient indicates the direct effect of globalization, whereas ðc

5. Concluding Remarks and Implications

Source: Constructed by Dreher (2006) and updated in Dreher et al. (2008).

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E½yi; ts ðei;t ei; t1 Þ ¼ 0; ð3Þ

E½X i; ts ðei; t ei; t1 Þ ¼ 0; for s 2; t ¼ 3; . . . ; T : ð4Þ

Z i ¼ diag ½yi; 1 ; . . . ; yi; ts ; X i; 1 ; . . . ; X i; ts for s 2; t ¼ 3; . . . ; T : ð5Þ

bi; t ¼ ½Dyi; t1 ; DX 0 i; t ; D/t : ð6Þ

E½Dyi; ts ðgi þ ei; t Þ ¼ 0 for s ¼ 1: ð8Þ

E½DX i; ts ðgi þ ei; t Þ ¼ 0 for s ¼ 1: ð9Þ

yi; t ¼ ayi; t1 þ c1 xi; t þ c2 ½xi;t AUTOCi;t þ b0 X0 i; t þ gi þ ut þ ei;t ; ð10Þ