Effect of Foreign Direct Investment on China Economic Growth: A Granger Causality Approach.

Abstract

The paper focuses on the causal effect of Foreign Direct Investment (FDI) on Economic growth of China and study period spanned from 1995 to 2010. Times series data drawn from the primary, secondary and tertiary sectors of the economy were used for the analysis. Granger causality statistical method was used in testing causal effect among the variables; we used E-view statistical software (version7). The Kwiatkowski- Philips-Schmidt-Shin (KPSS) unit root tests for stationary indicates that the variables are stationary at level. The Granger causality test indicates that, utilized FDI do not cause economic growth in primary industry, FDI in secondary industry cause economic growth and Economic growth cause FDI inflows in secondary industry, while economics growth cause FDI flow to tertiary industry of the economy. We recommend as follows; (1) Countries intending to benefit from FDI should carry out necessary and sufficient research before rolling out the policy and do so strategically as no all industry has casual effect on economic growth (2) The authority of host nation should divide foreign investment market to encouraged, restricted and prohibited industries. (3) Host nation should provide necessary incentive to FDI flowing to secondary and tertiary industry of the economy where necessary.