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Crowds in or crowds out? The effect of foreign direct investment on domestic investment in Chinese cities

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  • Yao Yao

    (Shanghai Lixin University of Accounting and Finance
    City University of Hong Kong)

  • Ruhul Salim

    (Curtin University)

Abstract

This study investigates the empirical relationship between foreign direct investment (FDI) and domestic investment (DI) in China using a comprehensive city-level panel over the period from 2003 to 2011. System-generalized method-of-moment estimation reveals mixed results. At the national level, FDI neither crowds in nor crowds out DI, indicating a neutral FDI–DI nexus. However, when the full sample is segmented by geographical topology, a positive and significant FDI–DI nexus can be found in eastern and, to a lesser extent, central cities. A negative, although insignificant, association is reported among western cities. Further, the empirical nexus is conditional on several local absorptive capacities including human capital, financial development, and institutional quality. These findings suggest that a region-based FDI strategy in general and local governments should strengthen their absorptive capacities to fully internalize FDI spillovers.

Suggested Citation

  • Yao Yao & Ruhul Salim, 2020. "Crowds in or crowds out? The effect of foreign direct investment on domestic investment in Chinese cities," Empirical Economics, Springer, vol. 58(5), pages 2129-2154, May.
    • Handle: RePEc:spr:empeco:v:58:y:2020:i:5:d:10.1007_s00181-018-1611-8
    DOI: 10.1007/s00181-018-1611-8
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    More about this item

    Keywords

    Absorptive capacities; Chinese cities; Domestic investment; Foreign direct investment; Panel model;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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