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Foreign Direct Investment, Domestic Investment and Economic Growth in China: A Time Series Analysis

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Author Info
Sumei Tang
E. A. Selvanathan
S. Selvanathan

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Abstract

This paper investigates the causal link between foreign direct investment (FDI), domestic investment and economic growth in China for the period 1988-2003 using a multivariate VAR system with error correction model (ECM) and the innovation accounting (variance decomposition and impulse response function analysis) techniques. The results show that while there is a bi-directional causality between domestic investment and economic growth, there is only a single-directional causality from FDI to domestic investment and to economic growth. Rather than crowding out domestic investment, FDI is found to be complementary with domestic investment. Thus, FDI has not only assisted in overcoming shortage of capital, it has also stimulated economic growth through complementing domestic investment in China. Copyright 2008 United Nations University. Journal compilation 2008 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9701.2008.01129.x
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Publisher Info
Article provided by Blackwell Publishing in its journal World Economy.

Volume (Year): 31 (2008)
Issue (Month): 10 (October)
Pages: 1292-1309
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Handle: RePEc:bla:worlde:v:31:y:2008:i:10:p:1292-1309

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  1. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May. [Downloadable!] (restricted)
  2. Noorzoy, M. S., 1979. "Flows of direct investment and their effects on investment in Canada," Economics Letters, Elsevier, vol. 2(3), pages 257-261. [Downloadable!] (restricted)
  3. Liu, Xiaming & Song, Haiyan & Romilly, Peter, 1997. "An Empirical Investigation of the Causal Relationship between Openness and Economic Growth in China," Applied Economics, Taylor and Francis Journals, vol. 29(12), pages 1679-86, December. [Downloadable!] (restricted)
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  4. Liu, Xiaohui & Burridge, Peter & Sinclair, P J N, 2002. "Relationships between Economic Growth, Foreign Direct Investment and Trade: Evidence from China," Applied Economics, Taylor and Francis Journals, vol. 34(11), pages 1433-40, July. [Downloadable!] (restricted)
  5. Gerald Epstein & Elissa Braunstein, 2002. "Bargaining Power and Foreign Direct Investment in China: Can 1.3 Billion Consumers Tame the Multinationals?," Working Papers wp45, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
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  6. Huang, Yasheng, 2003. "One country, two systems: Foreign-invested enterprises and domestic firms in China," China Economic Review, Elsevier, vol. 14(4), pages 404-416. [Downloadable!] (restricted)
  7. David Deok-Ki Kim & Jung-Soo Seo, 2003. "Does FDI inflow crowd out domestic investment in Korea?," Journal of Economic Studies, Emerald Group Publishing, vol. 30(6), pages 605-622, October. [Downloadable!] (restricted)
  8. Haishun Sun, 1998. "Macroeconomic Impact of Direct Foreign Investment in China: 1979-96," The World Economy, Blackwell Publishing, vol. 21(5), pages 675-694, 07. [Downloadable!] (restricted)
  9. Anthony B. Atkinson & Andrea Brandolini, 2001. "Promise and Pitfalls in the Use of "Secondary" Data-Sets: Income Inequality in OECD Countries As a Case Study," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 771-799, September. [Downloadable!] (restricted)
  10. Van Loo, Frances, 1977. "The Effect of Foreign Direct Investment on Investment in Canada," The Review of Economics and Statistics, MIT Press, vol. 59(4), pages 474-81, November. [Downloadable!] (restricted)
  11. Jin, Jang C & Yu, Eden S H, 1996. "Export-Led Growth and the US Economy: Another Look," Applied Economics Letters, Taylor and Francis Journals, vol. 3(5), pages 341-44, May. [Downloadable!] (restricted)
  12. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June. [Downloadable!] (restricted)
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  13. Caves, Richard E, 1971. "International Corporations: The Industrial Economics of Foreign Investment," Economica, London School of Economics and Political Science, vol. 38(149), pages 1-27, February. [Downloadable!] (restricted)
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