China’s FDI Spillovers Regional Differences

Since the reform and opening up, China’s government has constantly introduced preferential policies to induce FDI inflows, and FDI has played a pivotal role in our national economy. As of the end of December2011, China had approved a total of more than70million foreign-funded enterprises, and the cumulative actual use of foreign investment of had been over one trillion U.S. dollars. In the2003to2011period, the actual use of foreign capital was18000billion U.S. dollars in total, in which the actual use by the eastern region was up to6,000billion U.S. dollars, accounting for more than80%of the national FDI inflows,800billion U.S. dollars by the central region, accounting for about10%of the national FDI inflows, and500billion U.S. dollars by the western region, accounting for about5%of the national FDI inflows. The uneven distribution of FDI inflows in China presented its unbalanced phenomenon.China is still a developing country, so in terms of the level of financial development, whether FDI could play a positive role in promoting China’s economic growth? China’s foreign direct investment mainly flows to the eastern region where the level of economic development is relatively high. Whether the level of financial development plays a positive role in promoting FDI spillover effect in this region? In central and western regions where the level of financial development is relatively low, foreign direct investment inflows is less than that in eastern. So how does the level of financial development influent FDI spillover effect in these regions? Based on the differences of FDI spillover effect in eastern, central and western regions, this paper introduced the level of financial development, and discussed its relationship with FDI spillover effect. In this way we could help our country and its regions conduct FDI rationally, play FDI spillover effect better and develop policies appropriately. Therefore, the work has its meaning.We selected the panel data of eleven provinces and cities in eastern, eight provinces in central and10western provinces (excluding Tibet) from2003to2011as the study sample, combined theoretical method and empirical method, and analyzed the different influence of the level of financial development in eastern, central and western regions to FDI spillovers effect. This paper is divided into six chapters. The first chapter is the introduction, which describes the background and significance of the topics, the ideas and methods of the research and some literature review of FDI, FDI spillovers, financial development and economic growth. Also the framework of the study, the innovation and shortcomings are given in this part. The second chapter is the overview of FDI theory and financial development theory, which provide the theoretical basis for the following parts. The third chapter analyzes the regional differences of China’s FDI and its overflow channel. In this part, we firstly describe that FDI inflows are different in different regions and secondly describe the FDI overflow channels in the aspects of capital formation, exports, employment, industrial structure and technological progress. The fourth chapter describes the current situations and analyzes the differences of FDI and the level of financial development in China, mainly including variable index selection, development status description and the difference of regional distribution. The fifth chapter is the empirical research, using the fixed effects model and the empirical method of correlation analysis and regression analysis to find the main factors of FDI spillovers effect. The last chapter describes the conclusions and policy recommendations, which analyzes and concludes this research and proposes some correlative measures.Based on the study of FDI spillovers effect in China’s29provinces, we found that the differences in three areas were mainly on financial credit. In the2003to2011period, eastern region’s regression coefficient of the interaction of the level of financial development and FDI was positive. The quickly development of financial and credit markets could promote FDI spillover effect’s influence, but in the period we discussed, the FDI’s influence was not obvious. So we concluded that the influence of FDI spillover effect in eastern area could not be stronger with the growth of investment, but could grow with batter external environment. Consequently, there existed a threshold in eastern district. Only when the level of financial development was higher than the threshold, FDI spillover effect could have a stronger influence. In central district, FDI spillover effect could promote economic growth, but the promotion was not obvious and regression coefficient of the interaction of the level of financial development and FDI was also positive. It means that the level of financial development and financial environment have improved a lot these years.FDI spillover effect was positive in western district and during the observed period, FDI was one of the main factor to promote economic growth. However, the regression coefficient of the interaction of the level of financial development and FDI was negative. This was mainly because in western district financial market was less developed and the development of financial and credit markets was very slow. Thus, FDI spillover effect was limited. Therefore, China should create a batter financial environment and more developed financial and credit markets to make FDI spillover effect play a better performance.In this paper, the level of financial development is included in the analytical framework to study the differences of China’s FDI spillover effect in different regions, which is a complement to the existing literature. However, as there is only one variable to measure the level of financial development and the methods of regional analysis are traditional, the conclusion may be biased. So we hope it could be improved continually.