The Effects of FDI on Capital Formation in Central China ——Analysis Based on Dynamic Panel Data with System GMM Estimation

摘要

This paper studies the effects of FDI (Foreign Direct Investment) on capital formation in central, eastern, western and overall China based on dynamic panel data with 29 provinces, autonomous regions and municipalities from 1985 to 2005 by system GMM estimation. The results show that there are positive effects of the current FDI on capital formation in central, eastern, western and overall China. However, such positive effect appears evident in western China and eastern takes the second place while the weakest in central China. Lag 1 and lag 2 in particular FDI have negative effects on current capital formation in overall China, eastern, central and western China. Such negative effect in central China should be weaker than the western and more significant than the eastern. Consequently, we should take advantages of resources and labors in central China to strengthen its infrastructure construction. Central China should absorb more FDI to promote China’s harmonious development by bridging the gap among regions in terms of their capital formation and economic development.