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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 3: The interregional impacts of foreign direct investment on China’s inland economic growth

A Critical Assessment

Chunlai Chen

Extract

Foreign direct investment in China is heavily concentrated in the coastal region. Do inland provinces benefit from FDI in the coastal region? Chapter 3 investigates empirically the interregional impacts of FDI in the coastal region on the economic growth of inland provinces. By using a provincial-level panel dataset containing China’s 19 inland provinces over the period 1987–2014 and employing the fixed-effects and instrumental variable regression techniques, the study finds that, on average, FDI in the coastal region has had a negative impact on economic growth in inland provinces. By further dividing FDI in the coastal region into FDI in the coastal provinces engaging in medium-level processing trade and FDI in the coastal provinces engaging in high-level processing trade, the study finds that FDI in the coastal provinces engaged in medium-level processing trade has no significant interregional impact on the economic growth of inland provinces. However, FDI in the coastal provinces engaged in high-level processing trade still has a negative interregional impact on the economic growth of inland provinces. The explanation for this could be that processing trade has no industrial linkages with and cannot generate backward and forward knowledge spillovers to firms in inland provinces. Therefore, this study provides further evidence of the importance of industrial linkages in enhancing knowledge spillovers from FDI to the local economy.

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