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Economic Growth in China

20 Jan 2017Economics Essays

1. Context of the Problem

The last decade was characterized by the increasing importance of foreign direct investment (FDI) in global capital flows. By the end of the 1990s more than 50 percent of total private capital flow to developing economies was due to FDI (World Bank, 2000). In China this tendency resulted in dramatic growth of annually utilized FDI. While in 1983 the annual FDI in Chinese economy was only $636 million, in 2002 the figure increased by nearly hundred times to reach the milestone of $53 billion.

Moreover, during only one year, 2002, FDI in the country increased by a bit less than 13 percent, and it was estimated that approximately 420,000 foreign-funded enterprises in China were responsible for a cumulative volume of FDI of $448 billion (Morrison, 2003).

Rapid increase in FDI occurred largely due to changing understanding of the economic processes by policymakers in China and other developing countries. After the debt crisis of the early 1980s and confusing of many developing economies, suspicious attitude to FDI which prevailed in the previous years gradually disappeared, while emerging economies began to attract FDI.

The new tendency, evidently, owed a debt to the belief that foreign investments implied a number of economic benefits to the recipient state. Transfer of technological innovations, improvement of domestic management and employee training practices, productivity gains, access to new markets, and direct capital financing – all these economic advantages were considered to result from FDI and stimulate the growth of national economy (Grossman and Helpman, 1991).

Opponents of the established view about the direct linkage between FDI and economic growth list the following arguments. Firstly, many previous economic studies supporting the assumption of direct positive linkage were reasonably criticized in the recent research. Thus, economic growth was also found to have influence on FDI, while the early research took into consideration only one-way FDI-economic growth relationship (Kholdy, 1995). Secondly, one of the most recent theoretical developments in economic studies – ‘new growth theory’ – discovered that the role of FDI in growth of the economy should be reevaluated.

And finally, the latest approaches developed within the econometric theory, namely causality testing and time series concepts of reintegration, introduced new questions to the debate about the direct positive relationship between FDI and economic growth (Shan et al, 1997).

The existing abundance of literature dealing with the problem of relationship between FDI and economic growth coupled with the global economic transformations we are witnessing these days gives little hope that some final conclusion will be achieved soon. The present research is intended to investigate deeply into the issue of FDI-growth in Chinese economy – arguably the most perspective recipient of FDI for the next decade – in order to reveal which perspective provides more reliable and full argumentation.

2. Research Objectives

The purpose of the present research implies the following objectives:

to reveal the arguments which support the theory of one-way causality between FDI and growth of Chinese economy;

to expose the factors which put in question the established theory of one-way causality between FDI and growth of Chinese economy;

to contrast and compare validity and reliability of both types of arguments;

to issue a valid conclusion based upon the key findings of the study revealed in the previous chapters;

3. Significance of the Study

Premising from the assumption that the relationship between FDI and economic growth is rather complex than simple, the present research will help clarify the key arguments which support such assumption.

4. Literature Review

The relationship between FDI and economic growth has been discussed quite comprehensively in the economic literature.  Two types of arguments can be found within the existing research: the traditional argument that FDI improves economic growth and the newly established argument that no direct positive relationship exists between FDI and economic growth. Adherents of the latter perspective consider FDI rather a channel of international technology transfer than a direct enhancer of the economic growth.  

Thus, there is growing evidence that FDI stimulates technological development of the recipient state. Multinational companies are concentrated in industries with a high ratio of R&D as compared to sales, for example, and employ highly qualified workers with technical background. Being the most technologically advanced companies nowadays, multinational firms not only channel technological innovations to recipient market, but also produce spillover for domestic companies (Markusen 1995).

A number of recent studies have employed such methods as time series analysis and causality testing procedures to take a different perspective on the FDI-growth issue. This approach (normally addressed as ‘new growth theory’) acknowledges the fact that FDI stimulate economic growth in the recipient country. However, the new growth theory also allows for the reverse causality: rapid growth of GDP creates new capital requirements to which domestic economic system cannot respond, and thus induces the inflow of FDI.  (Dowling and Hiemenz, 1982; Lee and Rana, 1986; Shan et al, 1997; Schneider and Frey, 1995; Tsai, 1994; Lipsey, 1999; de Mello and Sinclair, 1995; de Mello, 1996).

Several authors developed models of economic growth in order to reveal and understand the variety of factors which contribute to this phenomenon. Namely, Borensztein et al (1998) developed a model which reveals the causality between technical progress, FDI, availability of capital goods, and economic growth. Yet, this model, as well as other models, has been recently criticized.

The study is not confined to overview of only the abovementioned works: a number of other studies, including articles, books, and working papers will help to make the research more comprehensive and reliable.

LITERATURE REVIEW WILL BE EXTENDED AFTER COMPLETION OF THE PROJECT (as you understand, numerous sources will be used in writing the project, and only at the end of work the writer will be fully aware about strengths and weaknesses of each source. In fact, a research proposal should include only a hypothesis to be tested and a brief overview of methodology, while the context, literature review, and structure are added at the end of work – this is the best way to avoid numerous revisions of the first chapter.)

5. Organization of the Study

The study will consist of five chapters – an introductory chapter explaining the purpose and methodology of the study and four main chapters each devoted to one specific objective listed above – which will fully reflect the purpose of the present research


  • Borensztein, E., J. de Gregorio and J-W. Lee (1998), “How does foreign direct investment affect economic growth”, Journal of International Economics, 45; pp.115-135.
  • Dowling J.M. and U. Hiemenz (1982) “Aid, Savings, and Growth in the Asian Region”, The Developing Economies 21; pp.3-13
  • Grossman, G. and Helpman, E. (1991) Innovation and Growth in the Global Economy, Cambridge: MIT Press
  • Kholdy, S. (1995) “Causality between foreign investment and spillover efficiency”, Applied Economics, 27: pp.74-79
  • Lee, J. and Rana, P. (1986) “The Effect of Foreign Capital Inflows on Developing Countries of Asia”, Asian Development Bank Economic Staff Paper, Manila.
  • Markusen, J.R. (1995), “The Boundaries of Multinational Enterprises and the Theory of International Trade,” Journal of Economic Perspectives, 9, 169-189.
  • de Mello, L.R. and Sinclair, M. Thea. (1995) “Foreign Direct investment, Joint Ventures, and Endogenous Work”, Department of Economics: University of Kent, Kent, UK
  • de Mello, L.R. (1996) “Foreign Direct Investment-led Growth: evidence from time series and panel data” Department of Economics: University of Kent, Kent, UK
  • Morrison, Wayne M. (2003) China’s Economic Conditions, Congressional Research Service: The Library of Congress

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