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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


  • Xu Gang

    () (Grand Valley State University, Michigan)

  • Wang Ruifang

    () (Nanyang Technological University, Singapore)


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.

Suggested Citation

  • Xu Gang & Wang Ruifang, 2007. "The Effect of Foreign Direct Investment on Domestic Capital Formation, Trade, and Economic Growth in a Transition Economy: Evidence from China," Global Economy Journal, De Gruyter, vol. 7(2), pages 1-23, June.
  • Handle: RePEc:bpj:glecon:v:7:y:2007:i:2:n:1

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    Cited by:

    1. You, Kefei & Solomon, Offiong Helen, 2015. "China's outward foreign direct investment and domestic investment: An industrial level analysis," China Economic Review, Elsevier, vol. 34(C), pages 249-260.
    2. Gunby, Philip & Jin, Yinghua & Robert Reed, W., 2017. "Did FDI Really Cause Chinese Economic Growth? A Meta-Analysis," World Development, Elsevier, vol. 90(C), pages 242-255.
    3. Chen, George S. & Yao, Yao & Malizard, Julien, 2017. "Does foreign direct investment crowd in or crowd out private domestic investment in China? The effect of entry mode," Economic Modelling, Elsevier, vol. 61(C), pages 409-419.
    4. Taguchi, Hiroyuki & Wang, Yining, 2017. "The effect of inward foreign direct investment on economic growth: The case of Chinese provinces," MPRA Paper 80731, University Library of Munich, Germany.
    5. 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.
    6. de Boyrie Maria E, 2010. "Structural Changes, Causality, and Foreign Direct Investments: Evidence from the Asian Crises of 1997," Global Economy Journal, De Gruyter, vol. 9(4), pages 1-40, January.
    7. Aharonovitz Gilad D, 2011. "Migration of Firms, Home Bias and Economic Growth," Global Economy Journal, De Gruyter, vol. 11(2), pages 1-30, July.
    8. Fukumoto, Mayumi, 2012. "Estimation of China's disaggregate import demand functions," China Economic Review, Elsevier, vol. 23(2), pages 434-444.
    9. Leino, Topias & Ali-Yrkkö, Jyrki, 2014. "How Does Foreign Direct Investment Measure Real Investment by Foreign-owned Companies? Firm-level Analysis," ETLA Reports 27, The Research Institute of the Finnish Economy.

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