A Research On The Impact Of FDI To Domestic Capital Formation

Since the reform and opening up, China's economy has been growing rapidly by attracting foreign investment. However, in China,the large influx of FDI exerted a crowd-out effect to the domestic investment instead of promoting domestic capital formation. Domestic and foreign related research mainly focuses on the macro-level, while effect of FDI in capital formation in the host country may differ in different sectors. Therefore, this paper studies the effects of FDI in capital formation from the industry point of view, and attempts to find out factors leading to FDI out of domestic capital.On the basis of explaining the mechanism about FDI on domestic investment squeezing effect,this paper uses 1999-2008 panel data of China's industrial sector and makes an empirical analysis of the relationship between FDI and domestic investment through establishing absolute squeezing model. In addition, in order to check the influence of different types industries for FDI capital formation effect, industrial sector is divided into several types from elements concentration differences, competition degrees differences and industry barriers to entry level three angles.Then this paper respectively test them.Finally,according to the empirical result analysis of the causes, we put forward some corresponding policy recommendations.After researching the mechanism about FDI on domestic investment squeezing effect,we argue that: FDI into the host of new industries, government into effect, FDI to play a positive correlation effects,its bring spillover effect and demonstration effect would increase domestic investment, resulting in Crowding; FDI into host traditional industries, financial repression and domestic and foreign policies of inequality in the host country,negative effect of FDI technology spillovers may lead to reduce domestic investment, which crowd out.Through empirical analysis, this paper found:from the industrial perspective,in fact, FDI has been squeezed out domestic investment and inhibited the growth of domestic capital to boost the economy, As the role of markets, technologies, systems and other factors; FDI crowding-out effect are different in different industries.Elements concentration differences, competition degrees differences and industry barriers to entry level affect the effect of FDI in capital formation.Therefore, this paper recommends that we should adopt means,such as strengthening the industrial policy guidance and optimizing the industrial layout, forming a reasonable market structure, increasing FDI spillovers, speeding up the technology progress of domestic enterprises and improving the quality of capital formation, to reduce or avoid the crowding-out effect.