Abstract
Endeavors have been made in this paper to discern the long-run relations between FDI (Foreign Direct Investment) and economic development in China in the comprehensive framework, which incorporates determinants as output, FDI, capital formation, employment, human capital and international openness. VAR (vector autoregressive models)Impulse Response, Variance Decomposition, Johansen Co-integration and VECM (vector error correction) have been estimated, focusing on the long-run structural relations; findings indicate that in the long run, FDI tends to decrease economic growth; economic development in China seems to be fueled by domestic capital accumulation and employment growth; FDI inflows do crowd out domestic capitals, and reduce employment growth.
Highlights
FDI (Foreign Direct Investment) and economic development in host country has always been an enduring interest in the development literature, in the context of China which have experienced unprecedented economic growth and enjoyed exceptional FDI inflow
vector autoregressive models (VAR) Impulse Response, Variance Decomposition, Johansen Co-integration and VECM have been estimated, focusing on the long-run structural relations; findings indicate that in the long run, FDI tends to decrease economic growth; economic development in China seems to be fueled by domestic capital accumulation and employment growth; FDI inflows do crowd out domestic capitals, and reduce employment growth
Shan [2] developed a VAR model but used technique of innovation accounting to generate the relationship between FDI with output via labor, investment, international trade and energy consumed, and concluded that FDI was not a significant motivator for growth, but an important determinant; Liu et al [3] focused on relations between FDI and GDP via international trade; Tan et al [4] found that impact of FDI on GDP is small but significant
Summary
FDI (Foreign Direct Investment) and economic development in host country has always been an enduring interest in the development literature, in the context of China which have experienced unprecedented economic growth and enjoyed exceptional FDI inflow. In 2004, FDI inflows constituted 7% of gross capital formation; 21% of China’s tax revenue were from foreign-invested enterprises (FIEs), 28% of industrial output and 57% of exports was produced and created by FIEs (China Statistical Year Book(2005)). Success both in economic development and attracting FDI in China has generated several studies on the role of FDI in economic development; the research has failed to generate a consensus on the relations between aggregate output, FDI, and other possible ancillary growthmotivating determinants, as capital formation, employment, human capital, etc. Cusing on the Johansen co-integration test, identified cointegrating vectors and VECM; Section 5 is the concludeing section, which presents the conclusions on the role of FDI amongst other variables upon output, and other determinants as domestic capital, employment
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