The Influence Of Changing Of Population Age Structure On The Foreign Direct Investment Inflow In China

In recent years, almost all the countries in the world are experiencing the change of population age structure. As the decline of birth rate and mortality rate results in some countries’ especially China’s decreasing of population growth rate, the ratio of old people over65years old is increasing year by year, thus aging trend is clear. Obviously, the change of population age structure will influence the economy; what’s more, the economic consequences caused by age structure changing arouse researchers’attention gradually and they study the economic effect of population age structure changing based on different angles. This article is going to analyze the influence of population age structure changing on foreign direct investment (FDI).Since foreign direct investment is a form of international capital flows, the article analyzes the mechanism of action of the influence of age structure changing on FDI in terms of international capital flows. This article studies the influence based on Mcdougall Model and the model stems from a paper made by Dirk Krueger and Alexander Ludwig in2006, and then it forms a theoretical transmission mechanism that population age structure in one country produce effect on FDI through functioning in the rate of return on capital. It finds that FDI, as a form of international capital flows, its flows is affected by the difference of the rate return on capital between countries based on Mcdougall Model, namely, FDI always flow from a country of low return on capital to one of high return on capital. The based on the model used by Dirk Krueger and Alexander Ludwig, it can infer how population age structure changing of a country affect its rate of return on capital. From this we can construct the mechanism of action of the influence of age structure changing on FDI based on two models above, i.e. change of population age structure---rate of return on capital---FDI. Specifically, decreasing of the working age to population ratio and increasing of the old age to population ratio result in decreasing of rate of return on capital and then give rise to reducing of FDI inflow. Therefore, it concludes that there is a positive correlation between the working age to population ratio and FDI and negative correlation between the old age to population ratio and FDI based on this mechanism of action.Then we use VAR to analyze the influence of population age structure changing on FDI and to verify whether the conclusion deduced by those two model conform to practical situation in China. The empirical test shows that there is a long-term equilibrium relationship between Chinese population age structure and FDI. From long-term view, the increase of the working age to population ratio will give rise to the rise of FDI inflow in China, otherwise, the decrease of the working age to population ratio and increase of the old age to population ratio will result in the decline of FDI in flow in our country. Thus, it can be seen that the conclusion about population age structure changing and FDI deduced by those two models comply with Chinese real situation in long-term. Then known by Granger causality test, the working age to population ratio and the old age to population ratio are Granger cause of change of FDI in China, namely, the working age to population ratio and the old age to population ratio can cause FDI flow. However, known by impulse response, although there is a long-term equilibrium relationship between Chinese population age structure and FDI, the influence of population age structure changing on FDI is unsteady in short-term.Then the article manage to prove the relationship between Chinese population age structure changing and rate of return on capital in order to do cause analysis towards empirical result above. Through empirical test, it can be seen that there is a positive correlation between the working age to population ratio and rate of return on capital and negative correlation between the old age to population ratio and the rate in China. Thus, the reason of positive correlation between the working age to population ratio and FDI is that the increase of the working age to population ratio gives rise to increase of rate of return on capital and then leads to rise of FDI inflow in China, on the contrary, the decrease of the working age to population ratio and increase of the old age to population ratio result in the decline of the rate of return on capital and then cause the outflow of FDI. Meanwhile, it also proves that the theoretical transmission mechanism deduced in Chapter3conforms to the real situation in China. However, according to population projection from China’s Population and Development Research Center, China’s population change remarkably over next20-30years, whose distinguishing feature is accelerate of aging structure and the working age to population ratio will tend to drop sharply. Based on analysis before, the decline of the working age to population ratio will lead to the decrease of FDI inflow. Therefore, accelerate of aging trend will produce a negative effect on FDI in China. In order to reduce the negative effect, the article proposes relative policy suggestion, such as improving the investment structure of FDI. etc.