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FDI Plays an Important Impetus in Fostering Local Economy in
Zhejiang Province
YU Miaozhi
Zhejiang University of Technology, Hangzhou P.R.China 310014
[email protected]
Abstract: According to the theory of economic growth and the economical development Situation of
Zhejiang Province, the author analysis the influence on foreign direct investment to the economy growth
and put forward the accordingly suggestions.
Keywords: Cointergration theory of economic growth FDI
Positive analysis
，
1
， ，
Introduction
At present, our country have numerous form of utilizing foreign capitals ,which generally can be divided
into foreign indirect investment and foreign direct investment .The foreign indirect investment includes
the loan of International Finance Organization, foreign government's loan, commercial loan of foreign
bank, export credit, issuing stock and bond to the outside, accepting grants and so on; Foreign direct
investment including joint venture with Chinese and foreign investment, Sino-foreign co-operative joint
venture, foreign businessman's individual proprietorship, China and foreign countries developing
cooperatively and BOT way, etc. Because foreign direct investment is the main form of utilizing the
foreign capitals of our country, so the use foreign capitals that in this paper mainly refer to utilizing the
direct foreign investments, including the foreign direct investment from Hong Kong, Macao and
Taiwan.
According the economic growth theory , the capital formed is in a key position all the time in the
course of economic development,. Harrold --Domar model have further proved the capital forms are
keys factors to determine economic growth rate, which based on Keynes income model Hereafter many
scholar estimate the contribution of capital to economic growth used Douglas production function, based
on Harrold --Domar model. Rostow regarded more than 10% capital accumulation type in " economic
take-off " as the precondition of developing country's economic take-off. In the theory ”two structure "
of Lewis, enlargement of the capital scale and the improvement of the pace of capital form ,which
regarded as basic way to expand the urban industrial department, promote the old motive force of rural
surplus to shift to the city, and then realize the industrialized.
At the stage for economic development, the shortfall of saving and the shortfall of foreign currency
should keep balance according the balanced theory of the macroeconomy. If we express the gross
investment with letter I, the letter S stand for deposits money, then I-S shows the difference of making
the investment and depositing money, i.e. deposit shortfall. If the letter M stand for import, X stand foe
export, M-X show difference that import and export, become foreign currency gap then. " two gap mode
" can be expressed as following:
I-S=M-X
But in fact, the factors which determine these two gaps are changed independently. To most developing
countries, greater disparity always exists in two gaps. In this case, we should adopt the adjustment way
of adopting foreign capital actively, on one hand we can remedy the deficiency of depositing money at
home, produce function on the deposit shortfall; On the other hand ,which can expand export, produce
function to foreign currency gap, make two gap realize the equilibrium under promoting situation that
economic growth rate raise. Under the condition of the open economy, utilize the foreign capitals is the
effective route to promote economic growth. overcome and save and restrain with the foreign currency
actively.
2 The situation and characteristic analysis on the direct investment of foreign
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businessman of Zhejiang Province
Since reform and opening-up policy in 1980s,Zhejiang ' s economy has witnessed a twenty-year
rapid development .In 2005,GDP of Zhejiang province reached RMB1336billion and GDP per capita
ranked top one on the list(except municipalities directly under the centre government). Zhejiang has
recently become a large province with great economic development. By the end of 2005,the foreign
project have reached 37685, accounting for 5.21%;Contract foreign investment reached
55.299billion,accounting for 3.96%.Seen from the absolute value of value FDI, Zhejiang
has made great progress in attracting FDI. In 2005,the foreign trade dependency ratio of Zhejiang reach
63.2%,the contribution of foreign to economic growth reach 36.5%.The rapid growth of foreign trade,
has already become one of the main motive force of spuring the economic growth of Zhejiang. How to
analysis impact and effect on economic growth of foreign trade of Zhejiang has becomg a focus
question which people pay close attention to. In this paper ,the author analysis the relationship
between the FDI and GDP by the advanced econometric, then put forward some beneficial suggestions .
＄
3 Data and the theory of econometric model
In this paper, the sample data of 1983~2005 come form the Statistical yearbook of Zhejiang. The
variables GDPt , FDI t are expressed present value. We solve the problem of heteroscedasticity lies in data
by logarithm to the two variables, the corresponding first difference series are expressed
∆ ln GDPt , ∆ ln FDIt .
3.1 The stationary test on variables
While we carrying on time series analysis, the time series must be stationary traditionally, i.e. the
variable have no stochastic trend and deterministic trend, Otherwise there is spurious regression in the
regression model. In fact, the economic variable of time series are non stationary usually. So it is very
essential to carry the stationary test to variable. The ADF test is the common way to testing the
stationary of variables.
ADF test is carry T test to the coefficient ρ in following model:
m
∆y t = α + βt + ρy t −1 + ∑ θ i ∆y t − i + ε t
(1)
i =1
In model (1), ∆ is the symbol of first difference , ε t is the term of stochastic errors; yt is the time
series we researched., m is the best period lagged ,which guarantees the stationarity of the error term
ε t .In fact, the best period lagged m is unknown, so I adopt the AIC criterion put forward by Engle and
Yoo to decide the best period lagged m. The definition of this criterion is as follows:
 T 2
 ∑ et 
2k
(2 )
AIC = log t =1  +
 T  2




In equation (2) ,
T
∑e
2
t
， T is the number of
is the square sum of residual of ADF estimate model(1)
t =1
sample, k is the number of the independent variable in estimate models. The value m is the best period
lagged made by AIC minimum.
3.2 Cointergration test
3.2.1 The concept of cointegration
The variables {xt }and {yt } is cointergrate , if the following two conditions that they meet:
① The nonstationary variables {x }and{ } both are I(1).
② There is a vector α = (α ,α ) ,makes Z = αX ~ I (d − b) .
t
1
2
yt
t
'
t
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In condition
②,
X t = ( xt , yt ) , b
> 0 ; Under above two conditions, we can think the time series
X 1t , X 2 t ,L X kt ~ CI (d , b )
3.2.2 The process of cointegration test
In 1987, the famous economist Granger and Engle put forward the two step way to test cointegration lies
in variable {x t }and {y t } .
The first step,we estimate the model (3) by OLS
y t = α + βx t + u t
(3)
Then we can achieve residual eˆt = y t − yˆ t ,here yˆ t = αˆ + βˆx t . The regression model (3) is called
cointegration model.
The second step: to test the integration of residual eˆt = y t − yˆ t .
If the eˆt = y t − yˆ t is stationary, then the variables
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{xt }and {yt }are cointegration.
Empirical analysis
4.1 The unit root test
We conducted the stationary test for the series variables ln GDPt and ln FDI t based on samples from
1985 to2005 . we get some results(see table 1).
Table 1 The unit root test result of ln GDPt and ln FDI t
ADF value
Critical value
Lagged
-2.6589
-3.0400
1
-3.4122
-3.0521
1
-1.6084
-3.0400
1
-2.0106
-1.9627*
1
variable
LnGDP
∆ (ln GDP )
LnFDI
∆(ln FDI )
：
。
Result (Y/N)
N
Y
N
Y
Notes: ∆ is the difference of variables *significant at the 10% level.
From table 1, we can find that the variable ln GDPt and ln FDI t are nonstationary, but the first difference variables
∆ ln GDPt and∆ ln FDI t are stationary.
4.1 Cointegration equation
In this paper, author used the statistical instrument EVIEWS 3.1 to establish cointegration equation.
First, we can achieve following cointegration regression model(4) used the data from 1983 to 2005.
4
ln GDP = 4.076+ 0.625 ln FDI
t
( 70.325 )
(12 .362 )
t
（）
The figure in the bracket is t statistic.
F=231.061 DW=1.82
R 2 = 0.978
From model (4),we can know: F statistic is significant, which means the assumption of linearity is
correct. The freedom of fitness R 2 is near to 1,which means the explanation of model is good. The T
statistic are also significant, which means the FDI have stronger influence on economic growth of
Zhejiang in the long run.
Second , the author test the stationarity of residual by the way of ADF test. The result see the following
table 2
，
Table 2 the unit root test of residual
ADF statistic valee
Critical value 5%
-3.156
-2.356
（ ）
Stationarity(Y or N )
Y
The result means ,in the 5% significant level, the residual is stationary. So there is a cointegration
relations between the FDI and economic growth. The cointegration relation is also call the long
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equilibrium relationship in economy. So the model (4) is the cointegration regression model. From the
model (4), we can known ,if the FDI increase 1%, the GDP can increase 0.625%.
4.2 Error Correction Model(ECM)
We have analyzed the long equilibrium relationship between the FDI and GDP, then what relationship
will lies in variables FDI and GDP in the short run? In this paper author analyzed the short relationship
between the FDI and GDP used the ECM.
The result of ECM is following:
∆ ln GDPt = 0.025
+ 0.374
∆ ln FDI t − 0.823* (ln GDPt − 4.076− 0.625 ln FDI t ) 5
*
*
(1.209 )
( 3.265 )
（）
( − 5.432 )
R-Square = 0.6590 DW=1.7908
LM 2 =1.247,LM 1 =0.5671 ARCH=0.3340
Notes:*Significant at the 5% level From the result in model (5), it is obviously that the coefficients is
significant at the 5% level, the coefficient of the error correction term is negative, which meet the
backward feedback mechanism.
Because of LM 2 = 1.247 < λ 0.05( 2 ) =5.99,
2
and
LM 1 =0.5671< λ 0.05(1) =3.84,
1
ARCH=0.3340< λ 0.05(1) =3.84, so there is no heteroscedasticity and autocorrelation in ECM.
1
The statistical of testing normality of residual is:
JB=1.9061< χ 0.05 = 5.99
The result indicate that the residual of ECM is normal.
From the ECM, we can find that there is a steady relationship between the difference variable
∆ ln GDPt , and∆ ln FDI t .In terms of mathematics, the ∆ ln GDPt is the rate of GDP increasing. In
the short term, the GDP will increase 3.74% as long as the FDI increase 1%.
2
5 Conclusions and Suggestion
The above empirical result show that there are prominent relations between FDI and the economic
growth of Zhejiang, The FDI plays the important impetus steadily to high speed of economy
development of Zhejiang. In recently years, Very great change has taken place in the characteristic of the
international direct investment, the competition of absorbing the foreign capitals is become more fiercer.
In this condition ,how can help Zhejiang province increase absorb the foreign investment? We can
consider the following suggestion.
First, we should optimize the investment environment of foreign businessman insistantly.. The above
empirical result shows that the economic growth is not the Granger causality to the increase FDI
Second, we should promote the existing foreign-investment enterprise to make big and powerful, which
is helpful to form the effect of cluster of enterprise and industry
In order to strengthen the international competitiveness, we also should impel foreign-investment
enterprise and national enterprise take shape a effective one related, make advanced knowledge,
technology, experience of management and corporate culture transplant to national enterprises, promote
the national enterprise's internationalization.
The third, we should adjust the industrial structure of Zhejiang by optimizing the structure of absorbing
foreign capital of Zhejiang, strengthen the international competitiveness of Zhejiang. At the same time,
we should optimize the structure of regional direct foreign investments in order to realize the balanced
development of the economic growth among the areas of the whole province;
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[3] Zhang Xiaotong..Econometric Analysis”.tianjing (2000), Economic Science Press.
[4] Yang Zhenning. The empirical analysis on the relationship between FDI and the economic growth.
International Trade. 2(2006), pp15~18
[5]Fei Wei. Empirical analysis of direct overseas investment and China's economic growth.
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