The Empirical Study On Foreign Direct Investment, Trade And Economic Growth

It has been widely acknowledged that there is an increasing role of foreign direct investment (FDI) in China's economy, since foreign direct investments not only directly promote China's economic development, but also generally influence China's trade development, employment structure and international payment balance etc. Therefore, it has been a hot research topic about how to evaluate the impacts of foreign direct investment on China' economy and accordingly carry out certain policies. Furthermore, as China has been a formal member of World Trade Organization, there is a implicit interrelationship between China's commodity trade and international capital flows, and hence how to make an objective evaluation on the internal relationship between openness and economic growth has been another research purpose of this dissertation.The relationship between- international direct investment and international commodity trade has been first qualitatively analyzed. The classic gravity model in trade theory is further applied and it is found that FDI truly promotes the provincial trade development of China's economy with other countries. Based on China's economic data during the period of 1979-2003, the cointegration and error correction model analysis reveals that FDI mainly promotes the development of China's manufacturing export, which means that FDI also helps to enhance China's export structure.The relationship between FDI and China's economic growth is further investigated. A new econometric method of partial least squares is chosen to analyze the determinants of China's foreign direct investments. Based on existent related literature, fifteen variables, including China's GDP and annual economic growth rate, are used to measure the determinants of China's FDI. The empirical results demonstrate that the impact of both China's and global economic growth rate on attracting FDI isn't so significant, and there is a negative relation between customs rate and FDI flows. Except those three variables, there is a certain significantly positive relation between other variables and FDI, among which the influences of exchange rate and import are the most significant. Further research is also conducted to compare the different impacts of foreign direct investment and domestic ones on China's economy. The empirical results show that even though both FDI and domestic investments are the major two driving forces of China's economic growth, their mechanism differs. FDI mainly promotes economic growth through its technology spillover effects on domestic firms, while domestic investmentsdo that mainly by capital accumulation. A case study on Hunan province's economy is also taken on FDI and regional economic development.Finally, the impact of China's entry into World Trade Organization is also analyzed in this dissertation, while we focus on the chosen of government's policies. Government's policies are first classified as two groups: domestic-oriented policies and outward-oriented ones. A structural econometric models system, which includes three simultaneous equations, is also established to evaluate the impact of various policies on China's economic growth. Our empirical result reveals that foreign forces, such as FDI and foreign trade play an increasing role in China's economic growth in recent years. Based on such empirical findings, it is further analyzed on the impacts of WTO agreements on China's economic development and foreign trade and a series of policy suggestions are finally made.