The dynamic relationship between trade openness, foreign direct investment, capital formation, and industrial economic growth in China: new evidence from ARDL bounds testing approach

Abstract

The objective of this research is to use annual data from 1990 to 2021 to examine the long- and short-run dynamic relationships among China’s trade openness (TRO), foreign direct investment (FDI), capital formation (K), and industrial economic growth (IEG) using the Autoregressive Distribution Lag (ARDL) method. Firstly, the results of the ARDL co-integration tests show that there is a long-run co-integration relationship among TRO, FDI, K, and IEG. Secondly, from a path of influence perspective, both the long- and short-run relationships are almost the same. Specifically, TRO, FDI, and K all have positive effects on IEG and vice versa, which supports the feedback hypothesis. However, contrary to the short-run relationship, TRO and K have a small negative effect on IEG, but this is not statistically significant. Finally, K and TRO positively affect FDI, while FDI negatively affects K, although the effect is minimal and negligible at the 10% significance level. On the contrary, they are not statistically significant in the long run. These results support the theory that technological innovation in the trade, investment and capital system based on economic and market capital can stimulate the development of China’s industrial economy.