The Crowding-Out Effect Of FDI In Jiangsu Province

The crowding-out effect of FDI is the negative effect caused by FDI(Foreign Direct Investment) to the DI (Domestic Investment). On the one hand, FDI can not only make up the foreign exchange and saving gap, but also bring in the advanced technologies, excellent management skills, and smooth marketing channels through the"Spill-over Effect"which will eventually increase the productivity of local firms. On the other hand, the superior technology employed by foreign firms allows them to produce more efficiently, and use their competitive advantages to drive local competitors out of business or foreclose investment opportunities for local investors. So FDI's effect on domestic investment on the capital formation——"Crowding-in"or"Crowding-out"has long been the subject of controversy.By employing a theoretical model from a Cournot framework, the relationship between DI and FDI is conducted. Based on the results, an empirical model is then developed to learn the reality of Jiangsu Province by exploring the data from Jiangsu Statistics Yearbooks (1985-2004). Combined with the comprehensive analysis of the current situation of Jiangsu Province, the seven reasons which may lead to the"Crowding-out"effect and some suggestions to improve the situation are introduced.The creative points of the paper may lies in the following aspects:(1) Focusing on the long-term relationships between FDI and DI by employing a"Cournot model"and conducting them both in the theoretical and empirical model;(2)Using the latest data to analyze the current situation of FDI in Jiangsu Province from the following five aspects, namely total scale, industry, country and regional distribution, and investment patterns; and exploring ten cities'data rather than the total ones from 1992 to the latest available, the expanded samples make the outcome more feasible than before.(3)After thoughtful consideration of the current situation of Jiangsu province, the seven possible causes of the crowding-out result and some suggestions are given.