How does optimizing the business environment affect the capital flows between northern and southern China? From the perspective of enterprises' location choice for out-of-town investment

Studying the impact of the business environment on capital flows between northern and southern China is vital for enhancing economic growth and reducing regional economic disparities; however, the micromechanisms of how the business environment affects the capital flows between the north and south have not been adequately explained. This paper attempts to explore the mechanism of how the business environment influences capital flows from a micro perspective, namely, the location choice of enterprises for out-of-town investments, through the analytical framework of business cost theory. By constructing provincial panel data using the business environment and listed companies' out-of-town investment data, the study finds that (1) optimizing the business environment in the target investment location significantly promotes cross-regional capital flow, especially among nonstate-owned and mature enterprises. (2) Asymmetry exists in the promoting effect of the business environment on capital flows between the north and south, with capital flowing more into the southern regions due to differences in the business environment of the investment destinations. (3) Reducing market and institutional transaction costs is how the business environment leads capital to flow into the northern and southern regions, respectively. Therefore, from the perspective of enterprises' location choice for out-of-town investment, this paper confirms the existence of a "siphon effect" in optimizing the business environment, providing an important micropathway to address the unbalanced and insufficient development between the northern and southern regions of China.