Foreign Direct Investment And Domestic Capital And Economic Growth In China

As is known to us all, a stylized fact about China's economy is its continuous transformation and growth. The change of the weight of state-sector in the whole economy could tell us how the transformation process was going on in China. In 1985, the ratio of the employment in state-sector to the total employment was 18.03 percent, which had already reduced to 9.71 percent in 2002. In 1985, state-sector accounted for 29.20 percent in the tax revenue, but till 2000, the same number was only 6.58 percent. Along with the transformation process is the high growth rate year by year. By the year of 2002, GDP and per capita GDP were 8 and 6 times more than that in 1978 respectively.China's transformation and growth happened in the context of opening-up. By the end of 2002, the accumulated foreign capital actually used in China was about $ 623.4 billion, more than 70 percent of which was Foreign Direct Investment (FDI). The ratio of FDI actually used to GDP increased to 4.17 percent from less than 1 percent in the early of 1990s. During the same period, its ratio to total fixed investment increased from 2.9 percent to 10.04 percent. By the year of 2001, foreign-funded enterprises accounted for almost half of total exports. Also, the share of taxes collected from these enterprises was up to 18 percent. High-tech product exports were dominated by foreign-funded companies. Even in the textile industry, where domestic firms have an advantage over foreign ones, foreign-funded firms' exports were about a quarter of the total exports.Only from these data, it's no doubt for us to believe that FDI played a significant role in China's economy. However, for theoretical research, what's more necessary is to understand the mechanism through which FDI impacted China's economy. Unfortunately, we couldn't find a satisfactory answer from the existing literatures about FDI. Obviously, how far we could understand FDI's role depends on the extent to which we know how economic growth took place. Early literatures about economic growth emphasized the importance of capital accumulation. Based on the "dual-gap" model, most literatures of FDI at that time held the argument that FDI contributed to host countries' growth by "injecting" badly needed capital. Ever since "Solow Model" came out, economists have always attributed economic growth more to "technical progress", which was considered as a "residual term" in the original Solow GrowthModel. Meanwhile, for related researches in the field of FDI, people realized that FDI is not only a kind of "capital", but also a "source" of technological advancement for host countries. As for theory development for FDI, it is out of question that our understandings in all respects go deeper. But for China, a country growing in the transformation process, these literatures are not enough, especially for us to deal with how FDI influenced China's transformation. It was these defections of existing literatures that provided a starting point for our research and "incentives" for us as well.The central topic in this dissertation was that, with continuous transformation and growth in China, what roles FDI would play. In other words, we wanted to ask how FDI affected the transformation process and growth. Maybe the relationship between FDI and domestic capital would make sense for these effects. To be specifically, the questions we tried to answer in this dissertation were: (1) How to specify the transformation process in China? (2) Would FDI have "crowding-out" or "crowding-in" effects on domestic capital? What implications would these effects have for the transformation process? (3) Compared to domestic capital, was FDI very special for economic growth? Would FDI improve TFP in China? Would FDI accelerate domestic capital accumulation? (4) Could we attribute the effects FDI had on transformation process and economic growth to the inefficiency of financial system? Should we take the transformation process into account when talking about how to reform financial system?This dissertation was structured according to these questions. With mathematical and econometrical models, we wanted to discuss these issues in depth. Chapter 1 was an overview for the literatures of FDI. Chapter 2 had a model to formalize China's transformation process under a closed framework, with the openness to outside not considered yet. Chapter 3 had a theoretical research on the relationship between FDI and domestic capital. Also in Chapter 4, the relationship was studied empirically with panel data at provincial level. With these three chapters together, we could have a clear idea about the effects of FDI on transformation process. In Chapter 5, we embarked on exploring the nexus between FDI and growth. Through Chapter 3 to Chapter 5, we again and again pointed out that, it's the imperfections of financial system that enlarged bad effects and dwindled good effects FDI would have. So in Chapter 6, the energy was devoted to investigating what the financial system was in the past, and what it should be in the future. In Chapter 7, conclusions andimplications would be given.Main results were listed below as for those issues we would talk about in this dissertation.China's Transformation: the precondition of privatization was the cost difference between state-owned companies and private companies had reached a threshold; private sectors' growing up lowered the threshold, and hastened the transformation process. It's also in this sense that we could use "State-economy Exits and Private-economy Enters" to specify the transformation process in China.FDI and China's Transformation: FDI had different effects on different kinds of domestic capital, and to a great extent these results had something to do with the discriminating and inefficient financial system; state capital got the most financial resources and was crowded in by FDI, individual capital got the least financial resources and was crowded out by FDI, and for share holding and joint ownership capital, the financial resources which got was less than state capital but more than individual capital, FDI had no significant effects. The effects of FDI on domestic capital contradicted the transformation process, and we could not conclude that FDI was beneficial to this process.FDI and China's Growth: FDI was of no significance for direct promoting the growth rate; but it did improve the technical efficiency in China; it also accelerated domestic capital accumulation. So on balance, for China's economic growth, FDI should be thought of as something like "catalyst".FDI and China's Financial System: the effects of FDI on transformation process and growth had something to do with the inefficient and discriminating financial system; meanwhile, FDI inflows shadowed the importance of financial system reformation, so actually FDI was a substitute for reshaping such a system. When restructuring the financial system, we should take the transformation process in the real sectors into consideration.