Foreign Direct Investment And Economic Growth: An Analysis On The Role Of Financial Market Development

Since the integration of world economy and because of the importance of China in the pace of international economic development, the volume of Foreign Direct Investment(FDI) is increasing rapidly in China,and China has become the second FDI inflows country of the whole world, only behind the united states, meanwhile, held the leadership among developing countries. Theoretically, FDI can improve the economic growth.Thus, most countries adopt a sort of preferential policies to attract FDI.Its influence on the economic growth has been paid more and more attention to.The function of FDI on the economic growth can be divided into two perspectives:First is the direct effect called capital accumulation effect, and the second is technical spillover, which leads to sustainable economic growth indirectly. However,this indirect effect is restrained by several factors, one of which is the development level of local financial markets. After reviewing the theory of FDI and economic growth, consolidating the theoretical foundation, we add the development of financial markets factor to the previous theoretical framework to discuss the role and the functional channel of financial market factors.By detailed literature review of the previous academic literature in this area, we can well prepared for this paper's later empirical analysis of China and avoid duplicate work.In order to make a more comprehensive analysis of this Problem, this paper carries out two levels of empirical analyses.The first level is the comparative analysis between United States and China. As we all know, the U.S.financial markets are well developed, but China, as a developing country, its financial markets start to develop just in recent years.Many aspects have yet to be improved and perfected. Carrying comparative analysis between such two countries, in which there is huge difference in the degree of financial market development, the result can be very persuasive. We use the U.S.data of the year from1980 to 2008,through the method of co-integration and Granger causality test, and get the conclusion that developed financial market in United States really promotes FDI spillover effect. Thus, it also benefits economic growth; the degree of the development of China's financial market failed to promote economic growth through functioning on FDI technical spillover. The second level is the eastern, central and western comparative analysis.Although the volume of FDI inflows in China shows a rising trend, but there is significant regional imbalance, and the levels of financial market development in east, central and western are also very different. Based on the above considerations, we establish an inter-provincial panel data econometric model from 1986 to 2008 to carry out an empirical comparison. The results showed that:the eastern region are relatively well as the financial markets will help the absorption of FDI spillover effects and ultimately play a positive effect on economic growth, its role of financial markets is very significant. The development of all aspects of central and western regions are relatively incomplete, especially in western region where financial markets are underdeveloped, central and western regions highly dependent on domestic funding, FDI effect of capital accumulation is significant, while technical spillover effect is not significant, our country still in the stage of extensive growth. Finally, according to the two levels of empirical conclusions, this paper also gives some corresponding policy suggestions.