A Different Look at Inward FDI into Mainland China

This paper aims to find out the relationship between inward FDI into China and China’s economic development. According to the descriptive analysis of FDI data from 1980 till 2007, we firstly found that there is a sectoral and regional biased distribution with regard to the inward FDI into China; we saw that the contribution of inward FDI to China’s economic development exhibits a reversed U shape (the turning point locates in the year of 2001). In order to figure out the main reason and the causal-effect relationship between inward FDI into China and China’s economic growth, we used ECM and Granger Causality Test based on the data between 1978 and 2001 in the second part. We found that within this period the causal-effect relationship between China’s economic development and inward FDI was bidirectional and the causal impact of China’s economic development on FDI was larger than the impact of FDI on China’s economic development. To discover the reason of reduced FDI contribution to China’s economic development since 2001onwards, we used the fixed-effect panel analysis based on a panel dataset consisting 31 provinces in China from 2001 to 2005. We found that inward FDI in China since 2001 onwards has negative spillover effect on China’s economic development. We argue that the reason might be the duplication effect of foreign firms, negative externalities of backward, forward and horizontal relationships between foreign and domestic firms, increased welfare loss, and China’s regional economic disparity.

Key Words: Foreign direct investment; economic growth; externalities, spillovers; China

JEL Codes: O19, O24, O40, P41

UNU-MERIT Working Papers ISSN 1871-9872