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Foreign Direct Investment, Domestic Investment and Economic Growth in China: A Time Series Analysis
Author(s) -
Tang Sumei,
Selvanathan E. A.,
Selvanathan S.
Publication year - 2008
Publication title -
world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/j.1467-9701.2008.01129.x
Subject(s) - foreign direct investment , economics , variance decomposition of forecast errors , china , gross private domestic investment , monetary economics , investment (military) , causality (physics) , granger causality , investment function , error correction model , macroeconomics , return on investment , domestic market , international economics , open ended investment company , cointegration , econometrics , international trade , production (economics) , politics , political science , law , physics , quantum mechanics
This paper investigates the causal link between foreign direct investment (FDI), domestic investment and economic growth in China for the period 1988–2003 using a multivariate VAR system with error correction model (ECM) and the innovation accounting (variance decomposition and impulse response function analysis) techniques. The results show that while there is a bi‐directional causality between domestic investment and economic growth, there is only a single‐directional causality from FDI to domestic investment and to economic growth. Rather than crowding out domestic investment, FDI is found to be complementary with domestic investment. Thus, FDI has not only assisted in overcoming shortage of capital, it has also stimulated economic growth through complementing domestic investment in China.