A Study On The Impact Of Foreign Direct Investment On China 's Economic Growth And Domestic Capital Formation

In recent years, China has been to improve the quality of foreign capital in the district, industrial distribution and investment methods etc. Such as, encouraging foreign capital transfer to the central and western areas, guiding foreign capital transfer to the high technology industry investment, promoting the diversification of investment methods. What is the background of these measures? Doesn’t foreign direct investment have positive effects on economic growth of China? Does it have negative effects on economic growth? Does it have negative effects on domestic capital? Therefore, this article tested the effects of foreign direct investment on the economic growth and domestic capital formation of China, using the panel data in the series of1998-2009and the31provinces of China, not considering the spillover effect of foreign direct investment. Specifically, it tested four questions.: First, whether the effect of the foreign direct investment on China’s economic growth is significantly positive or negative? or not significant?; Second, whether the contribution of the foreign direct investment to China’s economic growth is bigger than domestic investment or smaller?; Third, whether the foreign direct investment crowds-in or crowds-out domestic capital?;fourth, what is the different between the crowding-in(or crowding-out) effects of the foreign direct investment to state-owned capital and private capital?Using the panel data in the series of1998-2009and the31provinces of China, the empirical analysis result shows that:the foreign direct investment to China’s economic growth has significantly positive direct effect. Main possible reason is that China’s micro economy still exists the capital gap. The contributions of foreign direct investment to China’s economic growth is less than domestic capital. Main possible reason is that the industry distribution of the foreign direct investment, because the foreign direct investment is concentrated on labor intensive industry; The foreign direct investment has crowding-out effects on domestic capital, main possible reason is that the regional distribution of foreign direct investment and the way of investment. Because the industry distribution of foreign direct investment is concentrated in the eastern region, there are distinct trend of the independent investment; foreign direct investment has crowding-out effects on state-owned capital, has crowding-in effects on private capital. Main possible reason is the degree of financial support to private capital, because the private enterprise lacks the financial channels, financing methods is limited, so by cooperation with foreign enterprise or accepting financial support of foreign investment, the private capital resolves the financial problems, in this way, the foreign direct investment has crowding-in effects on private capital. Therefore, China’s the policy on foreign capital, such as the policies on the district, industrial distribution and investment methods etc are reasonable. China should encourage foreign investment transfer to the Midwest and technology, capital intensive industry, promote the diversification of investment methods further and expand to the financial support to private capital further.