GEP Research Paper 07/32
Foreign direct investment and regional inequality in China
Kailei Wei, Shujie Yao and Aying Liu
Summary
Using the largest panel dataset for the Chinese regions over 1979-2003 and employing an augmented Cobb-Douglas production function, this paper shows that FDI has been an important factor of economic growth in China. It also suggests that it is the uneven distribution of FDI instead of FDI itself that has caused regional growth differences.
Abstract
One downside effect of rapid economic growth in China has been the ever rising inter-regional inequality. Foreign direct investment (FDI) has been blamed for driving the Chinese regions apart. It is difficult to reconcile the positive effect of FDI on economic growth with its potential ‘negative’ effect on regional inequality. Using the largest panel dataset for the Chinese regions over 1979-2003 and employing an augmented Cobb-Douglas production function, this paper proves that FDI has been an important factor of economic growth in China. It also suggests that it is the uneven distribution of FDI instead of FDI itself that has caused regional growth differences.
Issued in October 2007
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