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A Research on the Impact of FDI on Chinese Domestic Capital Formation: Empirical Analysis Based on the Data of Panel Industry in China

Wuqin Sun, Songping Hu

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Abstract

After the reform and opening up, foreign investment has promoted rapid economic growth in China. However, the large influx of FDI exerted a crowding out effect to Chinese domestic investment instead of promoting domestic capital formation. This paper uses penal data from 1999 to 2008 of China's industrial sector and makes an empirical analysis of the relationship between FDI and domestic investment and the influence of FDI capital formation effect in different industries. The results show that together with the role of market, technology, system and other factors FDI has extruded domestic investment, and differences in concentration of production factors and competition degrees, and also entry barrier of various industries affect FDI effect to domestic capital formation.

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What this paper is about

After the reform and opening up, foreign investment has promoted rapid economic growth in China. However, the large influx of FDI exerted a crowding out effect to Chinese domestic investment instead of promoting domestic capital formation. This paper uses penal data from 1999 to 2008 of China's industrial sector and makes an empirical analysis of the relationship between FDI and domestic investment and the influence of FDI capital formation effect in different industries. The results show that together with the role of market, technology, system and other factors FDI has extruded domestic investment, and differences in concentration of production factors and competition degrees, and also entry barrier of various industries affect FDI effect to domestic capital formation.

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Available abstract

After the reform and opening up, foreign investment has promoted rapid economic growth in China. However, the large influx of FDI exerted a crowding out effect to Chinese domestic investment instead of promoting domestic capital formation. This paper uses penal data from 1999 to 2008 of China's industrial sector and makes an empirical analysis of the relationship between FDI and domestic investment and the influence of FDI capital formation effect in different industries. The results show that together with the role of market, technology, system and other factors FDI has extruded domestic investment, and differences in concentration of production factors and competition degrees, and also entry barrier of various industries affect FDI effect to domestic capital formation.

Key concepts: Foreign direct investment, China, Panel data, Competition (biology), Crowding out, Investment (military), Capital (architecture), Capital formation

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