Into The Extrusion Effect Of FDI On Domestic Investment

Since China adopted the reform and opening-up policy in late 1978, more and more foreign direct investment (FDI) is flowing in, which has contributed a lot to the fast growth of China's economy and has become an important drive of the nation. However, as every coin has two sides, FDI also has some negative effects to the economy and society. The Crowd-in and Crowd-out effects of FDI to domestic investment are discussed a lot by economists.Jiangsu and Zhejiang, both in the Yangtze River Delta, rank top in FDI volume among all the provinces. While FDI contributes a lot to their growth, it also has some negative effects. Although the location and economic development of the two provinces are quite similar, the Crowd-in and Crowd-out effects of FDI to domestic investment are very different. By developing a gross domestic investment model, this paper empirically analyses the relations between FDI and domestic investment using a large sample of data from 1985-2007. It shows that while in Jiangsu province FDI has obvious Crowd-out effect to domestic investment, especially since 1990, in Zhejiang province there is no obvious Crowd-in or Crowd-out effects. This paper focuses on the explanation of such differences and providing some political suggestion accordingly.The paper first of all reviews related research and articles by economists at home and abroad, and then makes a detailed comparison between FDI in the two provinces. Using C-D production function, the paper analyses the contribution of FDI to the economic growth of each province, which shows FDI is very important to Jiangsu province, however, there is no obvious relations between FDI and economic growth in Zhejiang province. Then, the paper researches the Crowd-in and Crowd-out effects both theoretically and empirically and explains the differences from several aspects. At last, the paper comes to a conclusion and also provides some suggestion according to previous analysis.