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The Effect of Foreign Direct Investment on Domestic Capital Formation, Trade, and Economic Growth in a Transition Economy: Evidence from China

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Author Info

  • Xu Gang

    ()
    (Grand Valley State University, Michigan)

  • Wang Ruifang

    ()
    (Nanyang Technological University, Singapore)

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    Abstract

    Studies of the effects of foreign direct investment (FDI) in the developing countries have reported many conflicting results. In this study, we test the effects of inward FDI on China's domestic capital formation, exports, imports, and GDP growth. To that end, we estimated four econometric equations using a data set covering the 1980-1999 period. A key finding of our research is that it was in the 1990s that inward FDI began to exert a significant effect in the Chinese economy. Our regression results show that the inflow of FDI has stimulated domestic investment in China. The growing presence of FDI appears to have enhanced the investment efficiency in the Chinese economy. Inward FDI is also found to have significantly increased China's exports and imports. The policy implications of our main findings are discussed. Several methodological issues pertaining to FDI research in China are also discussed.

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    Bibliographic Info

    Article provided by De Gruyter in its journal Global Economy Journal.

    Volume (Year): 7 (2007)
    Issue (Month): 2 (June)
    Pages: 1-23

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    Handle: RePEc:bpj:glecon:v:7:y:2007:i:2:n:1

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    Web page: http://www.degruyter.com

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    Web: http://www.degruyter.com/view/j/gej

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    Cited by:
    1. Ali Al-Sadig, 2013. "The effects of foreign direct investment on private domestic investment: evidence from developing countries," Empirical Economics, Springer, vol. 44(3), pages 1267-1275, June.
    2. Fukumoto, Mayumi, 2012. "Estimation of China's disaggregate import demand functions," China Economic Review, Elsevier, vol. 23(2), pages 434-444.

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