Foreign direct investment and economic development in China and East Asia

This thesis provides an empirical analysis on how Foreign Direct Investment could affect economic growth. The analysis focuses on China and two East Asian countries, South Korea and Taiwan, for the period from 1980 to 2006. A VAR system is applied to China and the other two countries, while innovation analysis, including variance decomposition and impulse response, is then undertaken to evaluate the influence of shocks on each variable. Cointegration analysis is introduced to capture the long-run equilibrium relationships. The results suggest a small negative effect of FDI on economic growth in China and Taiwan, and no significant influence on economic growth in South Korea. But we find that FDI could be attracted by rapid economic growth of all these countries. The traditional elements for growth, such as capital and labour are demonstrated to play important roles in stimulating economic growth, while the sustainable elements suggested by new endogenous theory, such as technology development and human capital, are found playing different roles across countries with respect to their strategies of development. In addition, a simultaneous equation model is estimated to capture the effects of policy instruments on output, FDI and other endogenous variables in China. Both direct coefficient effects and multiplier effects are calculated. The results indicate that the changes in capital formation, employment and human capital could decelerate the economic growth, while the changes in technology transfer and saving could have III accelerating effects on the change in output directly. FDI could affect the change in economic growth indirectly through an accelerating effect on capital formation and human capital. For the impacts of policy instruments, It draws a conclusion that the monetary policies, fiscal policies and commercial policies committed by the government are indeed appreciative for accelerating economic development in China. Together with the specific empirical results for China and other two East Asian countries, this thesis provides a more comprehensive framework to study the relationships between economic growth and FDI, with the VAR system focusing on the general overview and the simultaneous equation model targeting on the intermediates.