Impact of Fdi to China Growth

Topics: Economic growth, Economics, Investment Pages: 8 (2291 words) Published: August 7, 2008

The aim of the study is to investigate the impact of foreign direct investment on economic growth in China during the period 1992-2003. The research is based on data indicators of level of GDP and FDI for China during this time period. In research was used simple ordinary least squares method. Through econometric model we defined the relationship foreign investment and economic growth in terms of simple regression. The empirical results show positive but insignificant impact of foreign investment on economic growth. It is seen that foreign investment has a positive impact on economic growth because it serves as a channel through which new technology is transferred from one country to another. Key words: China, Economic growth, FDI, OLS


China experienced a dramatic industrialization since 1978 when economic reforms and open door policy occurred. Economic reform allowed reducing trade barriers which stimulated foreign direct investment rapidly. China entered WTO in 2001.Hence; more rapid development was expected due to fewer restrictions on foreign investment. Manufacturing and technology sectors form a core for production and productivity in China. Concerning case of China, government can also contribute to growth through three ways: increasing expenditure on education (labor), increase its investment (capital), increase its expenditure on R&D (technology). There are a lot of reasons for writing this paper on impact of FDI on economic growth in China. FDI played major role in Chinese economy. Eventually, FDI brings about capital. A sufficient amount of capital has been necessary to build up China’s economy and FDI has made a substantial contribution to this. The role of foreign companies has been to use management skills and technology, together with local labor, to improve overall productivity of the economy. Today China is the second veto power with an annual growth in real GDP in average about 9 %. If such growth will persist the World Bank expect China to be the largest world economy in future. For China it is advantageous to attract foreign investors, and also China surpassed United States of America as the largest recipient of FDI. Hence, as it was mentioned, it is reasonable to measure the impact of FDI on China’s economic growth after open door policy. The reminder of the paper will proceed as follows: The next section will provide an overview of economic growth theories, which explain what causes economic growth to increase i.e. what factors are important in the growth process of a country. I will try to estimate which theory can be applied to China. I will go through previous studies to analyze thesis. Third section will explore econometric model, in order to estimate does foreign investment have an impact on economic growth. Fourth section will provide numerical indicators of growth and FDI. Paragraph explains the meaning of FDI and provide different types if investment, as well as economic growth. The fifth section includes descriptive statistics for country. And final section will provide some tentative conclusions.

Literature review

2.1 Growth Theories
In growth accounting, a production function shows two sources of growth, output grows because of increase in inputs and due to increase in productivity. (1)Y = f (K,L)
(2) ∆Y/Y=∆A/A+ak∆K/K+an∆N/N
ak - elasticity of output with respect to capital
an – elasticity of output with respect to labor
(3) ∆A/A=∆Y/Y-ak∆K/K-an∆N/N

Under constant returns to scale with respect to capital and labor it can be related to Solow’s Growth model. Growth accounting equation is central in economic growth theory. It can be used to calculate the growth rate of total factor productivity. There are many reasons that changes in TFP can occur. In China, government regulations are complex, which create barriers to domestic companies for entering Chinese market, on the other hand foreign companies have take an advantage of...
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