The effect of inward foreign direct investment on economic growth: The case of Chinese provinces

Taguchi, Hiroyuki and Wang, Yining (2017): The effect of inward foreign direct investment on economic growth: The case of Chinese provinces.

Abstract

This article examines the effect of inward foreign direct investment (FDI) on economic growth with a focus on Chinese provinces by conducting the Granger causality and impulse response tests in a vector auto-regression (VAR) estimation. The study contributes to the reviewed literature by examining the FDI effect in such comprehensive ways as demand-side and supply-side models, and by clearing the endogeneity problem of targeted variables under a VAR framework. The main findings of this study were as follows. First, the positive effect of FDI on economic growth in Chinese provinces was confirmed by all the model estimations: statistical, demand-side and supply-side models. Second, from the regional perspectives, the positive effect of FDI on economic growth was found in the eastern region, but not in the non-eastern region. Third, no crowding-out effect of FDI on domestic capital formation was identified both in demand-side and supply side analyses.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inward foreign direct investment (FDI), Economic growth, Chinese provinces, Vector auto-regression estimation, Granger causality and Impulse responses
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East

References

Agya, A.A. and Wunuji, E.A. 2014. Effect of Foreign Direct Investment on China Economic Growth: A Granger Causality Approach. IOSR Journal of Economics and Finance, 2(4): 56-63.

Chen, Y. 2007. Impact of Foreign Direct Investment on Regional Innovation Capability: A Case of China. Journal of Data Science, 5: 577-596.

Chen, G.S., Yao, Y. and Malizard, J. 2017. Does foreign direct investment crowd in or crowd out private domestic investment in China? The effect of entry mode. Economic Modelling, 61: 409-419.

Farshid, P., Ali, S. and Gholamhosein, S. 2009. The Impact of Foreign Direct Investment and Trade on Economic Growth – Taking China, Korea, Malaysia, Philippines & Thailand for Example. China-USA Business Review, 8(12):37-43.

Hsiao, F.S.T. and Hsiao, M.C.W. 2006. FDI, exports, and GDP in East and Southeast Asia – Panel data versus time-series causality analyses. Journal of Asian Economics, 17: 1082-1106.

Levin, A., Lin, C.F. and Chu, C. 2002. Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108: 1–24.

Liu, Z. 2002. Foreign Direct Investment and Technology Spillover: Evidence from China. Journal of Comparative Economics, 30(3): 579-602.

Liu, Z. 2009. The Impact of Foreign Direct Investment on Economic Growth: Based on the Positive Analysis in China. Journal of Jiangxi Science & Technology Normal University, 04.

Liu, X., Burridge, P. and Sinclair, P.J.N. 2002. Relationships between economic growth, foreign direct investment and trade: evidence from China. Applied Economics, 34(11): 1433-1440.

Long, C., Yang, J. and Zhang, J. 2015. Institutional Impact of Foreign Direct Investment in China. World Development, 66: 31-48.

Pedroni, P. 2004. Panel Cointegration; Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis. Econometric Theory, 20: 597–625.

Wei, H. 2002. Effects. of Foreign Direct Investment on Regional Economic Growth in China. Economic Research Journal, 04.

Xu, G. and Wang, R. 2007. The Effect of Foreign Direct Investment on Domestic Capital Formation, Trade, and Economic Growth in a Transition Economy: Evidence from China. Global Economic Journal, 7(2).

Zhang, K.H. 2001. Roads to Prosperity: Assessing the Impact of Foreign Direct Investment on Economic Growth in China. International Economics, 54(1): 113-125.