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

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  • Tang, Sumei
  • Selvanathan, E.A.
  • Selvanathan, S.

Abstract

In this paper, we investigate the causal link between foreign direct investment (FDI), domestic investment and economic growth in China for the period 1988-2003. Towards this purpose, a multivariate VAR system with error correction model (ECM) and the innovation accounting (variance decomposition and impulse response function analysis) techniques are used. 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.

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File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2008/rp2008-19.pdf
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Bibliographic Info

Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number RP2008/19.

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Length: 18 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:unu:wpaper:rp2008-19

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Keywords: foreign direct investment; domestic investment; economic growth; multivariate VAR system; error correction model;

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  1. 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.
  2. Xiaohui Liu & Peter Burridge & P. J. N. Sinclair, 2002. "Relationships between economic growth, foreign direct investment and trade: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 34(11), pages 1433-1440.
  3. Xiaming Liu & Haiyan Song & Peter Romilly, 1997. "An empirical investigation of the causal relationship between openness and economic growth in China," Applied Economics, Taylor & Francis Journals, vol. 29(12), pages 1679-1686.
  4. L.R. de Mello Jr., 1996. "Foreign Direct Investment-Led Growth: Evidence from Time Series and Panel Data," Studies in Economics 9615, Department of Economics, University of Kent.
  5. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  6. 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.
  7. 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.
  8. Noorzoy, M. S., 1979. "Flows of direct investment and their effects on investment in Canada," Economics Letters, Elsevier, vol. 2(3), pages 257-261.
  9. 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.
  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.
  11. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  12. Andrea Brandolini & Anthony B. Atkinson, 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.
  13. Jin Zhang & David Bessler & David Leatham, 2006. "Does consumer debt cause economic recession? Evidence using directed acyclic graphs," Applied Economics Letters, Taylor & Francis Journals, vol. 13(7), pages 401-407.
  14. Jang Jin & Eden Yu, 1996. "Export-led growth and the US economy: another look," Applied Economics Letters, Taylor & Francis Journals, vol. 3(5), pages 341-344.
  15. 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.
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Cited by:
  1. Farla, Kristine & de Crombrugghe, Denis & Verspagen, Bart, 2013. "Institutions, Foreign Direct Investment, and Domestic Investment: crowding out or crowding in?," MERIT Working Papers 054, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  2. Gozgor, Giray, 2014. "Determinants of domestic credit levels in emerging markets: The role of external factors," Emerging Markets Review, Elsevier, vol. 18(C), pages 1-18.
  3. Yalta, A. Yasemin, 2013. "Revisiting the FDI-led growth Hypothesis: The case of China," Economic Modelling, Elsevier, vol. 31(C), pages 335-343.
  4. Naiwei Chen & Meiya Chang, 2013. "Financial Crisis and Corporate Liquidity: Implications for Emerging Markets," Asia-Pacific Financial Markets, Springer, vol. 20(1), pages 1-30, March.
  5. Temiz, Dilek & Gökmen, Aytaç, 2014. "FDI inflow as an international business operation by MNCs and economic growth: An empirical study on Turkey," International Business Review, Elsevier, vol. 23(1), pages 145-154.
  6. Varshavsky, Alexander, 2009. "Questionable Innovations in Data Processing with Incomplete Information about the Analyzed System in Absence of Applications Limitations," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 16(4), pages 116-133.
  7. A. Yasemin Yalta, 2011. "New Evidence on FDI-Led Growth: The Case of China," Working Papers 1107, TOBB University of Economics and Technology, Department of Economics.
  8. Yuqing Xing & Manisha Pradhananga, 2013. "How Important is Exports and FDI for China's Economic Growth?," GRIPS Discussion Papers 13-04, National Graduate Institute for Policy Studies.
  9. Xing, Yuqing & Pradhananga, Manisha, 2013. "How Important are Exports and Foreign Direct Investment for Economic Growth in the People’s Republic of China?," ADBI Working Papers 427, Asian Development Bank Institute.

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