Study On The FDI's Crowding-out-and-Crowding-in Effect Upon Domestic Investment

This dissertation is to test the effect of FDI on the level of domestic investment, and to investigate the channel through which inward FDI crowds out (CO) or crowd in (CI) on domestic investment, as well as to assess the impact of this CO/CI effect on the welfare of host countries. Logically, First, the paper, by developing a theoretical model, analyzes in detail the occurrence mechanism and channel of CO/CI effect of FDI from different perspectives; second, combined with the experience of inward FDI to China, the paper made an empirical test of CO/CI effect of FDI in China; third, it further analyzes the impact of CO/CI effect of FDI on the welfare of host countries; moreover, it is discussed in detail that what influence extent of the CO/CI effect and that whether there are the specific factor attributing to the CO effect of FDI in China, and on the base of the above discussion, some policies for preventing the CO of FDI in China are designed at last.This dissertation is made up of nine chapters and is organized as follows:As an introduction, chapter one presents the research topics, its character, scope and significance; then it reviews and summarizes the academic literature in some related studies both at home and abroad, as a basis and reference for the study; it also describes briefly the research path, framework and main methods; finally, it makes some basic conceptual definitions which is the logic beginning of the theoretical research.In chapter two, we proposes a theoretical model of the effect of FDI on domestic investment in the same industry, based on Cournot equilibrium, which captures FDI spillover effect, market skimming off effect and market expansion effect etc. The theoretical model shows that there is a threshold n_f~*, which when the FDI scale is less than, it has the CI eftect on the domestic investment; and which when the FDI scale is more than, it has the Co eftect on the domestic investment. Furthur study suggests that the threshold of FDI depends on the strength of FDI's spillover eftect; if the FDI's spillover eftect is rather weak, the threshold is less than zero, which means that FDI always crowds out the domestic investment in the same industry. Comparative static shows that FDI spillover effect, FIEs' cost (competitive force), the domestic enterprises' cost and initial number are the main factors which affect the degree of the intra-industry CO/CI of FDI. Meanwhile, the empirical results from China panel data are consistent with the theoretical expectation.Chapter three develops a theoretical model of the effect of FDI on domestic investment in the upstream and downstream industry, based on industry linkage. The result suggests that unlike intuition FDI doesn't always encourage the domestic investment in the upstream and downstream industry. It depends on the FIEs' purchase percentage in the host-country whether FDI has CO or CI effect on the upstream industry; and the substitute elastics between mediate input and capital in the downstream domestic enterprises decides on whether FDI crowds out or in the domestic investment in the downstream industry. According to comparative static, it is showed that the FIEs' purchase percentage, spillover effect and cost and the industries' mediate input rate are the main factor influencing the extent of the CO/CI effect of FDI on the upstream domestic investment; the industries' mediate demand rate and FIEs' spillover and cost are the key variable which affect the degree of the CO/CI effect of the FDI on the downstream domestic investment. The empirical evidences from China panel data confirm the theoretical judgments.Chapter four explores the impact of FDI on domestic investment from the perspective of factor markets (esp. the skilled labor market). It first analyzes whether and how FDI has effect on wage rate of the skilled labor, indicating that inward FDI raises wage rate of the skilled labor in host countries through skilled labors demand channel and salary spillovers channel; then it makes a further analysis of the effect that change in wage rate of skilled labors have on domestic investment; and finally by employing data from China, it estimates the CO/CI effect of FDI based on the skilled labor market. By doing so, it constructs a complete analysis path. The empirical results show that during sample period 1992-2005, the inflow of FDI enhances rise in the wage rate of China's skilled labors, and hence slows down domestic investment, that is, FDI crowds out domestic investment The empirical evidence backs up the argument that in China there exits the CO effect of FDI via the factor market(skilled labor market).Chapter five is to empirically test the CO/CI effects of FDI on domestic investment in China. As a background, this chapter briefly describes the evolution of China's FDI policies and the level of FDI since 1978; then by international comparison, this chapter analyzes some typical facts related to FDI in China; finally employing the VAR model, by utilizing the variance decomposition and Impulse Response Function, this chapter tests the CO/CI effect of FDI in China. It is showed that in the long-term there is the co-integration relationship among FDI, domestic investment and GDP, and FDI does have a crowding-out effect on domestic investment in China.Chapter six discusses in detail the impact of the CO/CI on the welfare of host countries. It develops a welfare model incorporating the CO/CI effect of FDI by extending Dixit and Grossman framework. The model shows that the effects of FDI on the welfare of host countries largely depend on the intensity of CO effect. When the CO effect of FDI is rather strong, FDI have a mainly negative influence on the welfare of host countries. The subsequent case analysis indicates that FDI in garment industry of China actually immerses the nation welfare of China. Chapter seven analyses in details the factors influencing the intensity of the CO/CI effect of FDI from two angles according to the mechanism of CO/CI in chapter two to chapter four.Chapter eight, combining with China's specific circumstances, makes an analysis of the china-specific factors which result in FDI CO effect in China from the policy and institution. The study shows that Chinese FDI policy with super national treatment and generalized preferences, a financial system which discriminates against private-owned enterprises and decentralized management system of FDI heavily contribute to China's FDI CO effect. Based on the analysis in the previous chapter, this chapter presents some general and enlightening suggestion on anti-FDI-crowding-out policy of China's.Chapter nine makes the conclusive remarks, and point out some orientations for the future research.