5 - Potential effects of foreign direct investment on development

Abstract

This chapter is closely related to the previous chapter and discusses in a preliminary way the potential effects of openness to FDI on China’s economic development. This chapter focuses on the potential mechanisms through which openness to FDI can impact China’s economic development. FDI inflows not only enhance capital accumulation in China, which in itself is crucial to China’s development, but also exert several spillover effects through different channels. The regression results of our preliminary empirical analysis in this chapter suggest that regional openness to FDI tends to promote regional total factor productivity (TFP) growth and hence regional income growth. Motivated by the preliminary discussions in this and the preceding chapter, we then proceed to investigate the impacts of openness to foreign trade and FDI on China’s economic development from a number of different perspectives in the subsequent chapters of this book.