Ebook The Effect of Domestic Investment, Economic Growth and Human Development on Foreign Direct Investment into China
China is one of the world’s fastest growing economies, and has attracted a large amount of foreign direct investment (FDI) over the last 20 years, leading developing countries as the largest recipient of FDI (Tang et al., 2008). Several factors of the Chinese economy and lifestyle can help to explain the substantial levels of FDI China has been experiencing. This paper examines the effects of economic growth and domestic investment on the amount of FDI China has received. In addition, this article also examines several human development variables that also seek to explain the high levels of FDI China has experienced over the last several decades.
The goal of this paper is to enhance understanding of the effects the Chinese economy and its people have on levels of FDI into the country. Various studies have examined the effects of FDI and economic growth. However, this paper observes not only economic factors regarding levels of FDI, but human development issues as well, where research is limited. China was chosen for this research since it has been one of the world’s fastest growing economies, and as a result received considerable levels of FDI. Therefore, the effects of domestic investment, economic growth and human development should be significant and help in understanding the correlation between these variables and FDI.
From a policy perspective, it is crucial to understand the effect domestic activity, both economic and social, has on FDI. Since China has received considerable levels of FDI, examining domestic economic activity and human development in China should yield interesting results. High levels of FDI can help bring technology to the host country. China’s high levels of FDI could lead to domestic technological spillover, that is, foreign companies will bring new technology and train Chinese workers, improving the Chinese economy. The Solow model suggests technological growth is a fundamental factor in increasing long run economic growth. Therefore, it is clear that FDI into China will have a positive impact on the domestic economy. However, what factors attracted these high levels of FDI in the first place? This study examines the three factors that are believed to answer this question, domestic investment, economic growth and human development.
Chinese domestic investment is the first variable thought to contribute to the amount of FDI the country attracts. If Chinese banks are investing heavily in domestic economic ventures, it is safe to assume there are many profitable businesses fulfilling Chinese demand. Domestic investment is measured by domestic credit provided by the banking sector, and domestic credit to the private sector. High levels of domestic investment indicate that individuals are opening new businesses and investing in their businesses. A high-quality domestic business environment should have an impact on the amount of FDI that flows into the country. Also, economic growth is examined when attempting to explain what brings FDI into China. Economic growth is measured by GDP per capita growth. When foreign businesses look to invest in China, they undeniably inspect how economic growth is in the country. Economic growth indicates that businesses in the country are doing well, and is a place businessmen may invest or start a business.
In addition to understanding the correlation between FDI, domestic investment and economic growth, it is imperative, from a policy point of view, to be aware of the impact human development variables have on FDI into China. Investigating human development factors and their correlation to FDI is where this research paper differs from similar studies. Numerous studies have examined, with varying results, the impact of economic growth and FDI. Previous research has also found the relationship between domestic investment and FDI. However, this study looks at these factors, as well as human development variables and their relation to FDI into China. Human development in this study is measured by three key variables, infant mortality rate, life expectancy, and education (measured using literacy rate). Therefore, this paper seeks to answer several fundamental questions that differ from previous studies. The first is to conclude whether economic growth in China has an impact on FDI into the country. Second, what has been the effect of high levels of domestic investment on the amount of FDI into the country? Lastly, this study seeks to investigate whether human development factors in China affect the amount of FDI that flows into the country.
The remainder of this article is organized as follows. Section 2 investigates trends in Chinese FDI, as well as historical economic growth, domestic investment, and human development. Section 3 is a literature review, and summarizes previous studies in this area of research. Section 4 discusses the empirical methodology and data used in this study. Section 5 reviews the empirical results of the paper, and section 6 contains a conclusion, and offers insight into potential policy implications based on the results of this study.
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