FDI and Economic Development: Evidence from Mainland China

Author(s)
Liyan Liu

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.

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.

Cite this paper

nullL. Liu, "FDI and Economic Development: Evidence from Mainland China,"*Journal of Service Science and Management*, Vol. 4 No. 4, 2011, pp. 419-427. doi: 10.4236/jssm.2011.44047.

nullL. Liu, "FDI and Economic Development: Evidence from Mainland China,"

References

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[1] H. Zhang Kevin, “Foreign Direct Investment in China,” Canadian Foreign Policy, Vol. 13, No. 2, 2006, pp. 35-50. doi:10.1080/11926422.2006.9673427

[2] J. Shan, “A VAR Approach to the Economics of FDI in China,” Applied Economics, Vol. 34, 2002, pp. 885-893. doi:10.1080/00036840110058941

[3] X. Liu, P. Burridge and P. J. N. Sinclair, “Relationships between Economic Growth, Foreign Direct Investment and Trade: Evidence from China,” Applied Economics, Vol. 34, 2002, pp. 1433-1440. doi:10.1080/00036840110100835

[4] J. R. Tan, M. Dong and Y. H. Zhou, “The Analyses of FDI and Economic Growth in China,” USA-China Business Reviews, Vol. 7, 2004.

[5] D. A. Dickey and W. A. Fuller, “Distribution of the Es- timators for Autoregressive Time Series with a Unit Root,” Journal of the American Statistical Association, Vol. 74, 1979, pp. 427-431. doi:10.2307/2286348

[6] D. A. Dickey and W. A. Fuller, “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root,” Econometrica, 1981, Vol. 49, pp. 1057-1072. doi:10.2307/1912517

[7] P. C. B. Phillips and P. Perron, “Testing for a Unit Root in Time Series Regression,” Biometrika, Vol. 75, 1988, pp. 335-346. doi:10.1093/biomet/75.2.335

[8] C. A. Sims, “Microeconomics and Reality,” Econometrica, Modeling Economic Series, Reprinted in: C. W. J. Granger, Ed., Clarendon Press, Oxford, Vol. 48, 1980, pp. 1-48.

[9] R. F. Engle and C. W. J. Granger, “Co-Integration and Error Correction: Representation, Estimation, and Testing,” Econometrica, Vol. 55, No. 2, 1987, pp. 251-276. doi:10.2307/1913236

[10] B. S. Bernanke and A. S. Blinder, “The Federal Funds Rate and the Channels of Monetary Transmission,” American Economic Review, Vol. 82, No. 4, 1992, pp. 901-921.

[11] J. D. Hamilton, “Time Series Analysis,” Princeton University Press, Princeton, 1994, pp. 355-391.

[12] A. K. Bera and C. M. Jarque, “Effcient Tests for Normality, Homoscedasticity and Serial Independence of Regression Residuals,” Economics Letters, Vol. 3, No. 6, 1980, pp. 255-259.

[13] S. Johansen, “A Stastistical Analysis of Cointegration for I (2) Variables,” Econometric Theory, Vol. 11, No. 1, 1995, pp. 25-59. doi:10.1017/S0266466600009026

[14] K. Juselius and S. Johansen, “Extracting Information from the Data: A Popperian View on Empirical Macro,” Discussion Papers, University of Copenhagen, Vol. 5, No. 5, 2005.

[15] A. Banerjee, J. Dolado, J. Galbraith and D. Hendry, “Co-Integration, Error-Correction, and the Econometric Analysis of Non-Stationary Data,” Oxford University Press, 1993. doi:10.1093/0198288107.001.0001

[16] A. Bhargava, “On the Theory of Testing for Unit Roots in Observed Time Series,” Review of Economic Studies, Vol. 53, 1986, pp. 369-384. doi:10.2307/2297634

[17] D. Kwiatkowski, P. C. B. Phillips, P. Schmidt and Y. Shin, “Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root,” Journal of Econometrics, Vol. 54, 1992, pp. 159-178. doi:10.1016/0304-4076(92)90104-Y

[18] R. F. Engle, D. F. Hendry and J. F Richard, “Erogenei- ty,” Econometrica, Vol. 51, 1983, pp. 277-304. doi:10.2307/1911990