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Foreign Direct Investment and the Chinese Economy

A Critical Assessment

Chunlai Chen

Foreign Direct Investment and the Chinese Economy provides a comprehensive overview of the impact of foreign direct investment, with extensive empirical evidence, on the Chinese economy over the last three and a half decades.
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Chapter 2: Regional characteristics and the impacts of foreign direct investment on China’s regional economic growth

A Critical Assessment

Chunlai Chen

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Over the last three and a half decades, China has achieved remarkable economic growth with an annual average real GDP growth rate of around 10 per cent. Chapter 2 investigates empirically how FDI has contributed to China’s regional economic growth and how the local economic and technological conditions of host provinces influence the extent to which FDI contributes to local economic growth. Through the application of a provincial-level panel dataset containing China’s 30 provinces over the period 1987–2014 and regression techniques, the study finds that FDI has contributed to China’s economic growth directly through capital augmentation and technological progress and indirectly through knowledge spillovers on the local economy. The study also finds that the contribution of FDI to economic growth is influenced by local economic and technological conditions. FDI has stronger impacts on economic growth through capital augmentation and technological progress in the more economically developed coastal provinces than in the less-developed inland provinces. While FDI has a positive and significant impact on economic growth through knowledge spillovers in the developed coastal provinces, positive knowledge spillovers of FDI on economic growth are absent in the less-developed inland provinces. This finding provides empirical evidence to suggest that local economic and technological conditions, especially local absorptive capability, do matter in influencing the diffusion of knowledge spillovers from FDI to the local economy.

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