Causal Interaction between Foreign Direct Investment Inflows and China’s Economic Growth

Abstract

This study examines the causal relationship between foreign direct investment (FDI) and economic growth in China over a 40-year period, from 1981 to 2020. Using a vector autoregressive (VAR) model, the study investigates the direction of causality between FDI and economic growth and finds that economic growth drives FDI inflows in China, rather than the other way around. The results suggest that policymakers should prioritize growth policies that foster sustainable economic expansion, rather than focusing solely on attracting FDI. The study contributes to the literature on the relationship between FDI and economic growth and highlights the importance of understanding the direction of causality between these two variables. Overall, these findings have important implications for policymakers seeking to promote economic growth and attract FDI to China.