The Crowd-out Effect Of China's FDI Inflow Against Other Asian Countries

It is an economic certainty that the country's development has a close relationship to its FDI inflow. Rapidly developing, Foreign Direct Investment has surpassed international trade to become perhaps the most important means of international economic connection, as well as functioning as the main part of foreign capital in developing countries. To compete for these scarce resources, countries around the world have lowered their threshold of inward FDI. Due to this phenomenon, economists and research institutions have begun to study the effects of FDI. Based on the introduction of FDI theories and their developments, as well as the findings of FDI models constructed by economists both in and outside of China, this thesis's focus is on the crowd out effect of China's FDI inflow to its Asian competitors.Since China began its reformation and open-door policies thirty years ago, China's FDI inflow has increased incrementally each year. Notably in 2003, China's FDI inflow surpassed that of the United States, for the first time having the largest FDI inflow in the world. China's FDI inflow has had a substantial effect on the Chinese economy as well as promoting marketization.We often focus on the amount of FDI inflow to a particular country, however we rarely note whether this increase has negative effects in relation to that of other countries. For this reason, this thesis firstly analyzes the history and present status of China and other Asia countries' FDI inflows, additionally displaying the research of the effects of FDI on other Asian countries. When multinational corporations make FDI decisions, the Institutional environment of the host country is also considered. Based on this observation, this thesis also demonstrates a cross-country comparison between China and other Asian countries' Institutional indexes to find whether or not the defect of China's institutional environment has affected its FDI inflow. After reviewing existing literature, we have found that there was little research on the crowd out effect of China's FDI inflow on its Asian competitors. As a result, to compliment this study we have added the "China effect" to the traditional FDI decision model, also combining theoretical research and empirical analysis to the examination of the crowd out effect of China's FDI inflow.The main find of our empirical analysis states that China's FDI inflow has not crowded out other Asian countries'FDI inflow. On the contrary, China's FDI inflow has had a positive effect on the FDI inflows of Hong Kong, Taiwan and Korea. Based on the results of Granger causality test, we found that there was indeed a positive relationship between China's FDI inflow and FDI inflows of Taiwan and Korea. However, similar results between China's FDI inflow and that of Hong Kong were not found and did not pass Granger's test.