The relationship between foreign direct investment and economic growth: An application on China

Increased globalization-international capital mobility has increased from past to present. In this sense, as a result of international capital mobility, competitive advantage came to the fore in international markets, and international companies directed their investments to different countries to gain a competitive advantage. One of the fundemental macroeconomic goals of developed and developing countries is to increase their economic growth rates. Particularly, the major obstacle for developing countries to reach their economic growth targets is the insufficiency of capital stock. In this sense, it is observed that developing countries compete with each other to attract foreign direct investment and take some incentive measures. The main reason for this competition and incentive practices is the economic gain from foreign direct investments. This study aims to investigates the impact of foreign direct investment on the economic growth in China for the period of 1979 to 2019. The methodology involves the use of bound test approach to cointegration (ARDL). In the study, while the GDP per capita growth rate representing the economic growth is included in the model as the dependent variable, also, the active population (15-65 years old) represents the total labor force, foreign direct investment (its share in GDP), and gross domestic fixed capital investments represent domestic investments (its share in GDP) included in the model as independent variables. According to the results of the ARDL bound test conducted for China, it has been observed that direct foreign capital investments increase economic growth in the long run in China. Besides, considering other variables examined, it has been found that the rise in gross domestic fixed capital investments increases and positively affects economic growth and that an increase in the active population reduces the economic growth by affecting it negatively.