Foreign Direct Investment On China's Economy Dynamic Analysis

Recently, during the transition of China's market regime and under the background of globalization, FDI's investment scale , investment strategy, investment structure and investment fields have generated a series of new changes, unlike the beginning of the reform and before joining WTO. Based on State Space Model and Kalman Filtering, this paper set up a Time-varying Parameter Model and Error Correction Model under the consideration of aggregate demand to analyze the effect caused by FDI on China's economic growth. The analysis mainly focused on the impact of FDI on China's GDP, Fixed investment and Foreign trade .This paper also investigated the function of FDI to China's transition of marker regime, furthermore brought out some corresponding policy suggestion.1. FDI pulls up less than one percent point to the growth of China's economy ,it makes less contributions to China's economy compared with the domestic investment pulling up the growth of economy more than 3.5 percent. But compared with the domestic investment, FDI is more efficient and produce more product per capital. The efficient of FDI is times than domestic capital and the productivity of FDI is 4 percent than domestic capital. Hence, in one hand, we should focus on the contributions made by FDI to the economy growth and in the other hand, we should make up use of the high productivity of FDI. Therefore, we should reset our plant policies, encourage domestic capital flowing into the plants with high technology and high revenues and absorb the advanced technology and management experience brought by FDI.2. FDI crowed out domestic investment before 1998. It is because that at that time the capital from Hong Kong, Tai Wan and Marco consist more than 80 percent of total FDI, which mainly focused on labor-incetive and export-leading industries. While in the middle time of 1990s', the export-leading industries with lowtechnology was highly developed, FDI was evitable competing with domestic capital mean while and hence crowed out the domestic investment. But this situation changed after 1999. Since 1997, more and more FDI from the U.S, Europe and Japan with high technology have flowed into China, which boosted the relevant industries in China. Hence, the relationship between FDI and domestic investment has been positive since 1999 meaning that the more FDI flows into China, the more domestic investment is needed. If we want to make fully use of the advantage of FDI with high technology and advanced management, we should develop our financial market in order to provide convenient and low cost fund to domestic firms.3. A large number of foreign direct investment enterprises take foreign trade as their main tasks of production and foreign trade produced by foreign direct investment enterprises make up more than 50 percent of total foreign trade of China. In the short term and also in the long term, foreign trade produced by foreign direct investment enterprises is strongly positive relevant with the total foreign trade of China. In the other word, foreign direct investment enterprises pull up the growth of China's foreign trade. Mean while, the surplus of foreign trade produced by foreign direct investment enterprises is mainly part of the total surplus of foreign trade of China.