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Does FDI Drive Economic Growth? Evidence from City Data in China

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Listed:
  • Weijun Wu
  • Ling Yuan
  • Xiaoming Wang
  • Xiaping Cao
  • Sili Zhou

Abstract

Foreign Direct Investment (FDI) and government spending are two important drivers of economic growth. We use Chinese city level data and document an inverse U shape relation between FDI and GDP growth. FDI’s diminishing growth effect becomes more salient for cities with greater budget deficit or relying heavily on local corporate tax. When foreign firms account for sizable share of local capital formation in the economy, FDI significantly crowds out public spending. We attribute the inverse U shape of FDI and growth to both tax distortion and crowd-out effect.

Suggested Citation

  • Weijun Wu & Ling Yuan & Xiaoming Wang & Xiaping Cao & Sili Zhou, 2020. "Does FDI Drive Economic Growth? Evidence from City Data in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(11), pages 2594-2607, September.
    • Handle: RePEc:mes:emfitr:v:56:y:2020:i:11:p:2594-2607
    DOI: 10.1080/1540496X.2019.1644621
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    Cited by:

    1. Simplice A. Asongu & Barbara D. Mensah & Judith C. M. Ngoungou, 2022. "Thresholds of external flows in financial development for environmental sustainability in sub-Saharan Africa," Working Papers 22/082, European Xtramile Centre of African Studies (EXCAS).
    2. Duan, Wenqi & Madasi, Joseph David & Khurshid, Adnan & Ma, Dan, 2022. "Industrial structure conditions economic resilience," Technological Forecasting and Social Change, Elsevier, vol. 183(C).
    3. Ha-chi Le & Thai-ha Le, 2020. "Foreign Direct Investment Inflows and Economic Growth in Singapore: an Empirical approach," Economics Bulletin, AccessEcon, vol. 40(4), pages 3256-3273.
    4. Kodjo N’Souvi & Chen Sun & Badoubatoba Mathieu DISSANI & Folly Dovénam YOVODEVI, 2021. "Impact of Chinese Foreign Direct Investment on the growth of West African Economic and Monetary Union (WAEMU) countries," Journal of Scientific Reports, IJSAB International, vol. 3(1), pages 9-25.
    5. Dongshui Xie & Caiquan Bai & Weiwei Xiao, 2022. "Institutional environment, development model transformation and North–South economic disparity in China," Growth and Change, Wiley Blackwell, vol. 53(4), pages 1877-1906, December.
    6. Mary Oluwatoyin Agboola & Festus Victor Bekun & Daniel Balsalobre-Lorente, 2021. "Implications of Social Isolation in Combating COVID-19 Outbreak in Kingdom of Saudi Arabia: Its Consequences on the Carbon Emissions Reduction," Sustainability, MDPI, vol. 13(16), pages 1-16, August.
    7. Abdul Sattar & Temesgen Hordofa Tolassa & Muhammad Noshab Hussain & Muhammad Ilyas, 2022. "Environmental Effects of China’s Overseas Direct Investment in South Asia," SAGE Open, , vol. 12(1), pages 21582440221, February.

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