The Function Of Financial Markets Between FDI And Economic Growth: Theory And Empirical Evidence

Since the volume of Direct Foreign Investment (FDI) is increasing rapidly in China, its influence on the economic growth has been paid more and more attention to. Theoretical study has found that FDI can not only contribute a capital accumulation effect to the host country, but also can lead it to a sustainable economic growth through the way of technical spillover. However, this promotion effect is restrained by several factors, while one of these is the development level of local financial markets.In order to make a more comprehensive analysis of this problem, this paper divides the question into two perspectives: the first is to measure the influence of financial factors on the import volume of FDI and the second is to measure the influence of financial factors on the absorptive capability of FDI in the host country. Considering the fact that financial marketization is not well established in China, quality improvement of financial system is more important than scale enlargement. Therefore, this paper invites an efficiency index calculated by DEA (Data Envelopment Analysis) to measure the efficiency of financial system (including credit market and stock market) in China, other than commonly used index system invented by Levine (1997). This paper first concludes the mechanism of how local financial factors influence on the introduction and absorption of FDI respectively the by reviewing the theory and research status at home and abroad. Then we use an easy model to state the relationship between financial development level and optimal absorption scale of FDI. On this basis, three levels of empirical study are carried out. The first level is to examine the relationship between financial development level in China and the import volume of FDI. The second level is to test correlation between financial development and FDI absorption by using time series data from year 1982-2006. The third level is a comparative analysis targeted at regional financial development (East, Middle and West) based on panel data from year 1999-2005.The inspection results shows that both scale enlargement of credit market and improvement of financial market efficiency in China can benefit the import of FDI, while the volume of stock market displays an inhibition. During a comparatively long period, scale enlargement of credit market, credit ratio of privacy sector and improvement of financial efficiency can significantly improve the absorptive capability of FDI at national level. However, the regional empirical test shows that scale enlargement of credit market has restrained the absorption of FDI while financial market efficiency has exerted a significantly positive effect. Besides, the influence of stock market shows no statistical significance. According to the results of empirical study, this paper also offers relevant policy suggestions.