China’s Economic Miracle
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China’s Economic Miracle

Does FDI Matter?

Sumei Tang, Eliyathamby A. Selvanathan and Saroja Selvanathan

This insightful book analyses the impact of Foreign Direct Investment (FDI) in China as well as making valuable contributions to the theory of FDI more broadly. The authors provide empirical analysis of key factors including the location-specific determinants of FDI; the impact of FDI on domestic investment, income distribution, consumption and tourism; the relationship between FDI inflows and income inequality; causality between FDI, domestic investment and economic growth; and causality between FDI and tourism. The study concludes that FDI plays a crucial and positive role in the economic development of China. Rather than crowding out domestic investment, FDI is found to stimulate economic growth by complementing it.
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Chapter 3: Extensions on the Theory of FDI to Host Countries and Empirical Studies on the Impact of FDI

Sumei Tang, Eliyathamby A. Selvanathan and Saroja Selvanathan


3.1 INTRODUCTION FDI has played an increasingly important role in world economic development, while increasingly globalization has also brought challenges to the existing FDI theories. Most existing theoretical FDI studies1 are based on the experiences of developed countries and from the perspective of MNEs to identify and analyse the determinants of FDI or the motives of MNEs investing abroad. In general, those FDI theories do not explicitly discuss the effects of FDI on host countries, especially on developing countries, although FDI is well known to have a significant effect on economic growth. FDI has been a controversial issue for a long time with regard to consideration of its role in the economic development of developing countries. The controversy has existed in theoretical discussions, empirical studies and policy formulation for developing countries. Unfortunately, how FDI impacts on the economic development of a host country, especially the developing countries, is still far from being well understood. Towards a better understanding and for the empirical studies followed in this book, this chapter extends the theoretical and empirical FDI studies to develop a theoretical framework on the impact of FDI on the economic development of a host country based on a number of foreign capital theories (the orthodox economic concepts of marginal productivity theory, the modernization hypothesis / the dependency theory). The organization of this chapter is as follows. Section 3.2 is about extensions to the existing theories on FDI. Section 3.3 provides empirical studies on the impact of FDI and the last section...

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