Interaction of Foreign Direct Investment and Exports with Growth

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The aim of this study is to explore the sustainability of Chinese economic growth with reference to foreign direct investment and exports. Some conservative measures like net exports to the gross domestic product as well as export to GDP prejudiced and do not analyze precisely measure the role of external demand in the growth of the economy. We measured growth in the economy using GNI per capita that exposes the effect of FDI and exports in the country, ultimately causing growth in the economy. Our proposed analysis offers a more precise calculation of the economy of China to external shocks, with aspects of FDI and export effect on growth. Analyzing data from the year 1985-2014 for the Chinese economy and applying unit root test, Johansen cointegration, vector error correction model and Granger causality, we found the long run interaction between export, FDI, and growth. Granger causality test indicates two ways short run interaction between export and growth, while one-way causality between FDI. We analyzed that Chinese economy is chiefly dependent on exports while the balance from growth in the economy towards demand at domestic level has not been attained yet.