Causality Between FDI and Economic Growth in China

Studies on how foreign direct investment (FDI) interacts with host economic growth are obviously important. Using the vector autoregression (VAR) approach developed by Toda and Phillips, we examine the causality between FDI and growth in China by conducting time-series estimations through ADF [Augmented Dickey Fuller] unit-root tests, cointegration tests, and error-correction analyses. The result reveals that the two-way causality between FDI and growth in China is not highly significant. China's economic growth indeed attracts FDI influx, which supports the market-size hypothesis; while the FDI influx stimulates the economic growth of China to some degree, the result is not significant.