A Study On The Effects Of China's Inward FDI On It's Bilateral Trade With Different Home Countries

Over 20 years has been passed since China conducted it's openning-up policy; The development of China's economy during this period demonstrates that Foreign Direct Investment(FDI) has significant impacts on China's foreign trade. China's inward FDI skyrocketed in the 1990s and meanwhile China's foreign trade developed accordingly. In 2007 China's total import and export volume exceeded $2000 billion with it's ranking in world trade moved up to the 3^rd place. As China's foreign trade and utilization of foreign investment develops quickly, more and more research has been done on the relations of the two parties. However, most of them only aims to indicate the overall relationship, while those concerning cross country differences in the relation of the two parties are quite rare. The purpose of this paper is to make clear cross country differences in the effect of China's inward FDI on it's bilateral trade. With one problem to be dealt with: whether China's inward FDI from different home countries is a substitute or complement for bilateral trade; whether it exists significant cross country differences in the effect of FDI on trade. And furthermore the trade potential will be considered both statically and dynamically.This paper applies gravity model and selects the data from 1994 to 2005 of FDI, total trade volume of export and import, Gross Domestic Product(GDP), GDP per capital and distance from thirty-one countries. The method of panel data is utilized to empirically analyze the relationship between China's inward FDI and bilateral trade. With a conclusion has been achieved, which is: There is significant variations in the trade creation or substitute effect of FDI of different home countries in China. Through the analysis on trade potential, we got the result that trade between most of the countries and China show a characteristic of so called "trade overage" statically and "trade shortage" dynamically. According to the result of trade potential analysis, the paper addresses that the international market may be devided into two categories, which are trade potential recreating market and trade potential developing market. Based on empirical analysis, the paper further proposes that the quality of FDI is more important than the quantity of FDI, and at the time of developing international market, the trade policy should be established on the above two international market.