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A Simultaneous Equation Model of Economic Growth, FDI and Government Policy in China


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  • J L Ford
  • S Sen
  • Hongxu Wei
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    Empirical investigations aimed at determining what relationship, if any, exists between FDI and economic growth has drawn ambiguous results. This is also the case for China, where all empirical studies have used the VAR methodology. In this study we outline a dynamic simultaneous equations model. The model captures the interrelationships between, aggregate output, domestic capital, FDI, human capital, and the state of technological development. As well as broadening the formulation of the production function, the model is defined to include possible influences from government capital expenditure on the infrastructure. Structural equations are then developed to determine those variables, and further factors are introduced into the model thereby, such as saving and wealth, and other exogenuous policy variables. The latter embrace monetary, commerical and fiscal policy. Two of the potential influences on the system, and hence upon economic development, are financial liberalisation and the general opening-up of the Chinese economy, since 1979. The dynamic multipliers from the estimated model indicate, amongst other things, that the general set of economic reforms has beneficial impact on long-run economic growth, directly and indirectly by its enhancement of FDI.

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    Bibliographic Info

    Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 10-25.

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    Length: 46 pages
    Date of creation: Jul 2010
    Date of revision:
    Handle: RePEc:bir:birmec:10-25

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    Related research

    Keywords: Economic growth factors; FDI; spill-over effects of FDI; monetary policy; commercial policy; fiscal policy; "opening out" reforms; GMM estimates; multipliers;

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    1. David Greenaway & David Sapsford & Stephan Pfaffenzeller, 2007. "Foreign Direct Investment, Economic Performance and Trade Liberalisation," The World Economy, Wiley Blackwell, vol. 30(2), pages 197-210, 02.
    2. Blomström, Magnus & Kokko, Ari, 1997. "Regional Integration and Foreign Direct Investment," CEPR Discussion Papers 1659, C.E.P.R. Discussion Papers.
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