Abstract
This study examines the impact of foreign direct investment (FDI) on economic growth in China based on time series data for the period 1981-2018. For an empirical study, we used vector autoregressive (VAR) analysis. Before building our VAR model, we performed tests for unit root, normality, and heteroscedasticity to certify the data quality. The optimal lag 3 was selected using the Akaike information criterion (AIC), Schwartz (SC), and Hannan-Quinn (HQ) criteria. The Granger causality test is additionally performed. Based on the VAR model, we determined the impulse responses and variance decomposition of log FDI and log GDP in China. The results showed a positive and consistent impact of log FDI on China’s economic growth. The impact in the short-term is insignificant, as it is likely that there are multiple factors drive economic growth of China besides FDI inflows. However, the impact of FDI increases to a significant level in the long-term. Which indicates that FDI is one of the main factors to enhance Chinese economy. In conclusion, we suggest a policy implication how to sustain and promote the existing positive effects of FDI inflows on Chinese economy.
Highlights
Foreign direct investment (FDI) is one of the most important driving forces of economic and social growth in developing countries
The inflows of FDI in advanced industries in China showed the growing tendency: the FDI inflows in high-tech manufacturing increased by 5.7%; the FDI inflows in pharmaceutical manufacturing increased by 43.9%; the FDI inflows in electronics and communication equipment manufacturing increased by 10.6%; the FDI inflows in the hightech service industry increased by 43.4% [1]
Our study empirically investigates whether the positive impact of FDI on the Chinese economy is still valid by including recent dataset for the period 1981-2018
Summary
Foreign direct investment (FDI) is one of the most important driving forces of economic and social growth in developing countries. The role of FDI to upgrade advanced industries in China is expected to be consistently significant for the further economic growth, which already achieved stark economic growth based foreign capital flows in basic industries from the early 1990’s as one of the four Asian tigers. In this vein, our study empirically investigates whether the positive impact of FDI on the Chinese economy is still valid by including recent dataset for the period 1981-2018. Based on the result, we provide practical policy implications of full use of FDI for future economic growth of China in conclusions
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