An Analysis Of The Effects Of FDI Inflow On Domestic Investment In China

Since the beginning of reform and opening up,Foreign Direct Investment (FDI) in China has been growing. In 2005, China, one of the largest FDI host countries, actually used FDI of 60.3 billion US dollars. With increase of the inflow, FDI has played a positive role more obviously in the process of capital accumulation in China and it will accordingly affect the domestic capital formation. Based on the framework of VAR model, the paper uses cointegration test, impulse response function and vector error correction model to analyze FDI's effect on total domestic investment of China. By empirical analysis, it shows: in the long-run equilibrium state, FDI crowds in domestic investment, and in the short-run, FDI crowds out domestic investment; To different ownership economies, in the long-run equilibrium state, FDI crowds in state-owned companies and collective companies, but crowds out the private companies, in the short-run, FDI crowds out state-owned companies and collective companies, but crowds in the private companies. Error correction coefficient and the impulse response plan shows that there will be a long period to adjust from the state of non-equilibrium to equilibrium. China is now still in the short-term effect of FDI on domestic investment. And it may also take a very long time to reach the long-run equilibrium state.The main reasons of FDI's short-term effect on domestic investment include: the structural imbalance of FDI, super-national treatment to FDI, low competitiveness of domestic enterprises, financial constraints on the financial markets, and so on. The impacts of FDI's short-term effect on domestic investment have both positive and negative sides. The negative impacts include: control of a number of sectors and markets, strikes on the national industries, disappearance of some domestic brands and loss of high-tech talent. The positive impacts include: improvement in production efficiency of domestic enterprises and in the international competitiveness of domestic enterprises, and acceleration of private economies.Finally, based on the causes and consequences of FDI's short-term effect on domestic investment, in addition to the current circumstance in China, several suggestions are offered.