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


  • J L Ford
  • S Sen
  • Hongxu Wei


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.

Suggested Citation

  • J L Ford & S Sen & Hongxu Wei, 2010. "A Simultaneous Equation Model of Economic Growth, FDI and Government Policy in China," Discussion Papers 10-25, Department of Economics, University of Birmingham.
  • Handle: RePEc:bir:birmec:10-25

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    References listed on IDEAS

    1. Blomström, Magnus & Kokko, Ari, 1997. "Regional Integration and Foreign Direct Investment," CEPR Discussion Papers 1659, C.E.P.R. Discussion Papers.
    2. 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, February.
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    More about this item


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

    JEL classification:

    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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