The FDI-led growth hypothesis: further econometric evidence from China

Abstract

Despite a large volume of econometric literature on the impacts of foreign direct investment (FDI) on economic growth in developing countries, the question of causality linkage between them has only been investigated very recently. This paper re-examines the FDI-led growth hypothesis in the case of China, a country which has become one of the major FDI recipient countries in the world. The study is based upon quarterly time series data and a vector autoregresion (VAR) model applying the Granger no-causality procedure, developed by Toda and Yamamoto (1995), to test the causal link between the inflow of FDI and real output growth. Four distinct features in this paper stand out as follows: first, the FDI-led growth study on China applying Granger no-causality testing procedure is the first attempt in the literature and hence is attractive; second, we have gone beyond the traditional two-variable relationship by building a six-variable VAR model in the production function context to avoid the possible specification bias; third, we follow Riezman, Whiteman and Summers (1996) to test the hypothesis while controlling for the growth of imports to avoid producing a spurious causality result; and finally, the methodology by Toda and Yamamoto is expected to improve the standard F-statistics in the causality test process. The results emerging from our research indicate a two-way Granger causality running between output growth and FDI inflows.