Foreign Direct Investment and Economic Growth in China: A Panel Data Study for 1992-2004

The role of foreign direct investment (FDI) continues to be debated and tested in the literature on international economics and development economics. This paper extends the previous empirical studies on the issue by developing a new framework and providing some evidence from panel data of China. We first identify possible channels through which FDI may affect (positively or negatively) the Chinese economy. Then we work on a growth model, in which direct effects and spillovers of FDI are specified. The provincial data over the period of 1992-2004 are used to assess to what extent the remarkable FDI inflows affect China’s income growth. The results suggest that FDI seems to promote income growth, and that this positive growth-effect seems to rise over time and to be stronger in the coastal than the inland regions. JEL Code: F21, F23, and O53. Key word: Foreign direct investment; economic growth; spillovers. * This paper is prepared for the conference of “WTO, China and Asian Economies” to be held at University of International Business and Economics (UIBE), Beijing, China in June 24-25, 2006. I am grateful of Yu Chen’s research assistant work. The usual disclaim applies.