How Does FDI Affect Economic Growth in China?

Abstract

How does inward foreign direct investment (FDI) affect a transitional economy? This study attempts to analyze the role of FDI in China's income growth and market-oriented transition. We first identify possible channels through which FDI may have positive or negative effects on the Chinese economy. Using a reasonable growth model and cross-section and panel data in the period of 1984-98, we provide an empirical assessment, which suggests that FDI seems to help China's transition and promote income growth, and that this positive growth-effect seems to rise over time and to be stronger in the coastal than the inland regions.

Keywords: Foreign direct investment, economic growth, and transition

JEL Classification: F21, F23, O53