Impact of Fdi to China Growth

2283 Words Jul 31st, 2008 10 Pages

The aim of the study is to investigate the impact of foreign direct investment on economic growth in China during the period 1992-2003. The research is based on data indicators of level of GDP and FDI for China during this time period. In research was used simple ordinary least squares method. Through econometric model we defined the relationship foreign investment and economic growth in terms of simple regression. The empirical results show positive but insignificant impact of foreign investment on economic growth. It is seen that foreign investment has a positive impact on economic growth because it serves as a channel through which new technology is transferred from one country to another.
Key words: China, Economic
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Robert Solow explained growth in output as a result of capital accumulation and technological progress. However, there is a limitation; it fails to explain how and why technological progress occurs.
One of the main contributors to endogenous growth theory is Paul Romer. Professor Paul Romer developed new growth theory which can be applied to economies like China. His growth theory is relevant to developing economies, because it deals with technological spillovers. Romer’s model starts with the assumption that growth process originate from the level of the firm or industry. Because China has constant returns to scale in production, the model does not violate the assumption of perfect competition. This theory relies on some neoclassical growth theory assumptions which can not be applied for developing economies. Economic growth in such nations hampered by poor infrastructure and imperfect markets. This is a case of China and these very important factors are overlooked by the new growth theory.

2.2 Previous Studies
In previous studies of FDI and its effect on output and economic growth, many economists’ researchers have concluded that foreign investment has a positive impact on economic development. There are several studies of FDI “as an engine for growth” in China.Zhang (2006)

Kevin H. Zhang (2006) studies the relationship between FDI and economic growth in China.
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