Outward foreign direct investment and economic growth in China: evidence from asymmetric ARDL approach
Abstract
The current study explored the dynamics between economic growth and overseas investment, using time series annual data from China. For empirical analysis, we utilized asymmetric ARDL technique, which documents the potential asymmetric effects of outward foreign direct investment on economic growth in both the long run and short run. The empirical results suggest that ignoring the intrinsic asymmetries may conceal the true information about the equilibrium relationship among the variables and thus lead to misleading results. Particularly, the findings revealed that economic growth in China responds positively but differently to an increase and decrease in its overseas investment. The empirical evidence obtained through asymmetric model seemed to be superior to that of symmetric model and thus leads to more efficient policymaking to achieve sustainable economic development. Our study contributes to the existing literature by providing new insights on the outward foreign direct investment-led growth hypothesis. The findings suggest that firms investing abroad can bring source country benefits by securing access to key input factors and accessing advanced foreign technology.
Keyword : outward FDI, economic growth, time series, asymmetric ARDL, dynamic multiplier, China
How to Cite
Ali, U., Shan, W., Wang, J.-J., & Amin, A. (2018). Outward foreign direct investment and economic growth in China: evidence from asymmetric ARDL approach. Journal of Business Economics and Management, 19(5), 706-721. https://doi.org/10.3846/jbem.2018.6263
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Lecraw, D. J. (1993). Outward direct investment by Indonesian firms: Motivation and effects. Journal of International Business Studies, 24(3), 589-600. https://doi.org/10.1057/palgrave.jibs.8490247
Lee, C. G. (2010). Outward foreign direct investment and economic growth: Evidence from Japan. Global Economic Review, 39(3), 317-326. https://doi.org/10.1080/1226508X.2010.513143
Li, J., Strange, R., Ning, L., & Sutherland, D. (2016). Outward foreign direct investment and domestic innovation performance: Evidence from China. International Business Review, 25(5), 1010-1019. https://doi.org/10.1016/j.ibusrev.2016.01.008
Li, X., & Liu, X. (2005). Foreign direct investment and economic growth: An increasingly endogenous relationship. World Development, 33(3), 393-407. https://doi.org/10.1016/j.worlddev.2004.11.001
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multiplier in a nonlinear ARDL framework. In R. C. Sickles, & W. C. Horrace (Eds.), Festschrift in Honor of Peter Schmidt: Econometric methods and applications (pp. 281-314). New York: Springer. https://doi.org/10.1007/978-1-4899-8008-3_9
Stevens, G. V., & Lipsey, R. E. (1992). Interactions between domestic and foreign investment. Journal of International Money and Finance, 11(1), 40-62. https://doi.org/10.1016/0261-5606(92)90020-X
Sunesen, E. R., Jespersen, S. T., & Telle, M. H. (2010). Impacts of EU outward FDI. In Final report. Copenhagen Economics.
Tan, B. W., Goh, S. K., & Wong, K. N. (2016). The effects of inward and outward FDI on domestic investment: Evidence using panel data of ASEAN–8 countries. Journal of Business Economics and Management, 17(5), 717-733. http://doi.org/10.3846/16111699.2015.1114515
Todaro, M. P., & Smith, S. C. (2006). Economic development (9th ed.). Harlow: Pearson Education Ltd.UNCTAD. (2006). World investment report 2006: FDI from developing and transition economies: Implications for development. United Nations: New York.
UNCTAD. (2017). World investment report 2017: Investment and the digital economy. United Nations: New York and Geneva.
Weng, Y., Yang, C. H., & Tu, F. C. (2010). Outward foreign direct investment and product quality of domestic productions: An empirical investigation. Journal of Business Economics and Management, 11(3), 396-414. https://doi.org/10.3846/jbem.2010.19
Wesson, T. (1999). A model of asset-seeking foreign direct investment driven by demand conditions. Canadian Journal of Administrative Sciences, 16(1), 1-10. https://doi.org/10.1111/j.1936-4490.1999.tb00183.x
World Bank databank. (2017). Retrieved from http://databank.worldbank.org/data/
You, K., & Solomon, O. H. (2015). China᾽s outward foreign direct investment and domestic investment: An industrial level analysis. China Economic Review, 34, 249-260. https://doi.org/10.1016/j.chieco.2015.02.006
Zhang, K. H. (2006). Foreign direct investment and economic growth in China: A panel data study for 1992-2004. In Conference of WTO, China and Asian Economies, 24th June 2006 (pp. 1-18). University of International Business and Economics, Beijing, China.
Zhang, Y., Chen, W., & Yang, P. (2011). OFDI impact on domestic investment efficiency: Based on China᾽s experience, in international conference of Machine Learning and Cybernetics (ICMLC), Guilin, China. IEEE, 3, 1279-1283. https://doi.org/10.1109/ICMLC.2011.6016925
Al-Sadiq, A. (2013). Outward FDI and domestic investment: The case of developing countries (Working Paper, No. 13/52). International Monetary Fund.
Ali, U., & Wang, J. J. (2018). Does outbound foreign direct investment crowd out domestic investment in China? Evidence from time series analysis. Global Economic Review, 47(4), 419-433. https://doi.org/10.1080/1226508X.2018.1492431
Azman-Saini, W. N. W., Baharumshah, A. Z., & Law, S. H. (2010). Foreign direct investment, economic freedom and economic growth: International evidence. Economic Modelling, 27(5), 1079-1089. https://doi.org/10.1016/j.econmod.2010.04.001
Bahmani-Oskooee, M., & Ghodsi, S. H. (2017). Asymmetric causality and asymmetric cointegration between Income and house prices in the United States of America. International Real Estate Review, 20(2), 127-165.
Barro, R. J., & Sala-i-Martin, X. (2004). Economic growth (2nd ed.). Cambridge, London: The MIT Press.
Cai, K. G. (1999). Outward foreign direct investment: A novel dimension of China᾽s integration into the regional and global economy. The China Quarterly, 160, 856-880. https://doi.org/10.1017/S0305741000001363
Child, J., & Rodrigues, S. B. (2005). The internationalization of Chinese firms: A case for theoretical extension? Management and Organization Review, 1(3), 381-410. https://doi.org/10.1111/j.1740-8784.2005.0020a.x
Desai, M. A., Foley, C. F., & Hines, J. R. (2005). Foreign direct investment and domestic capital stock. American Economic Review, 95(2), 33-38. http://doi.org/10.1257/000282805774670185
Dunning, J. H. (2001). The eclectic (OLI) paradigm of international production: Past, present and future. International Journal of the Economics of Business, 8(2), 173-190. https://doi.org/10.1080/13571510110051441
Eregha, P. B. (2012). The dynamic linkages between foreign direct investment and domestic investment in ECOWAS countries: A panel cointegration analysis. African Development Review, 24(3), 208-220. https://doi.org/10.1111/j.1467-8268.2012.00317.x
Fousekis, P., Katrakilidis, C., & Trachanas, E. (2016). Vertical price transmission in the US beef sector: Evidence from the nonlinear ARDL model. Economic Modelling, 52, 499-506. https://doi.org/10.1016/j.econmod.2015.09.030
Fu, X. (2008). Foreign direct investment, absorptive capacity and regional innovation capabilities: Evidence from China. Oxford Development Studies, 36(1), 89-110. https://doi.org/10.1080/13600810701848193
Goh, S. K., & Wong, K. Y. (2014). Could Inward FDI offset the substitution effect of outward FDI on domestic investment? Evidence from Malaysia. Prague Economic Papers, 23(4), 413-425. https://doi.org/10.18267/j.pep.491
Herzer, D. (2008). The long-run relationship between outward FDI and domestic output: Evidence from panel data. Economics Letters, 100, 146-149. https://doi.org/10.1016/j.econlet.2007.12.004
Herzer, D. (2010). Outward FDI and economic growth. Journal of Economic Studies, 37, 476-494. https://doi.org/10.1108/01443581011075424
Hijzen, A., Jean, S., & Mayer, T. (2011). The effects at home of initiating production abroad: Evidence from matched French firms. Review of World Economics, 147(3), 457-483. https://doi.org/10.1007/s10290-011-0094-x
Hsu, W. C., Wang, C., & Clegg, J. (2015). The effects of outward foreign direct investment on fixed-capital formation at home: The roles of host location and industry characteristics. Global Economic Review, 44(3), 353-368. https://doi.org/10.1080/1226508X.2015.1077720
Katrakilidis, C., & Trachanas, E. (2012). What drives housing price dynamics in Greece: new evidence from asymmetric ARDL cointegration. Economic Modelling, 29(4), 1064-1069. https://doi.org/10.1016/j.econmod.2012.03.029
Knoerich, J. (2017). How does outward foreign direct investment contribute to economic development in less advanced home countries? Oxford Development Studies, 45(4), 443-459. http://doi.org/10.1080/13600818.2017.1283009
Kotrajaras, P. (2010). Foreign direct investment and economic growth: A comparative study among East Asian countries. Applied Economics Journal, 17(2), 12-26.
Kouakou, A. K. (2011). Economic growth and electricity consumption in Cote d᾽Ivoire: Evidence from time series analysis. Energy Policy, 39(6), 3638-3644. https://doi.org/10.1016/j.enpol.2011.03.069
Lai, M., Peng, S., & Bao, Q. (2006). Technology spillovers, absorptive capacity and economic growth. China Economic Review, 17(3), 300-320. https://doi.org/10.1016/j.chieco.2006.04.005
Lecraw, D. J. (1993). Outward direct investment by Indonesian firms: Motivation and effects. Journal of International Business Studies, 24(3), 589-600. https://doi.org/10.1057/palgrave.jibs.8490247
Lee, C. G. (2010). Outward foreign direct investment and economic growth: Evidence from Japan. Global Economic Review, 39(3), 317-326. https://doi.org/10.1080/1226508X.2010.513143
Li, J., Strange, R., Ning, L., & Sutherland, D. (2016). Outward foreign direct investment and domestic innovation performance: Evidence from China. International Business Review, 25(5), 1010-1019. https://doi.org/10.1016/j.ibusrev.2016.01.008
Li, X., & Liu, X. (2005). Foreign direct investment and economic growth: An increasingly endogenous relationship. World Development, 33(3), 393-407. https://doi.org/10.1016/j.worlddev.2004.11.001
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multiplier in a nonlinear ARDL framework. In R. C. Sickles, & W. C. Horrace (Eds.), Festschrift in Honor of Peter Schmidt: Econometric methods and applications (pp. 281-314). New York: Springer. https://doi.org/10.1007/978-1-4899-8008-3_9
Stevens, G. V., & Lipsey, R. E. (1992). Interactions between domestic and foreign investment. Journal of International Money and Finance, 11(1), 40-62. https://doi.org/10.1016/0261-5606(92)90020-X
Sunesen, E. R., Jespersen, S. T., & Telle, M. H. (2010). Impacts of EU outward FDI. In Final report. Copenhagen Economics.
Tan, B. W., Goh, S. K., & Wong, K. N. (2016). The effects of inward and outward FDI on domestic investment: Evidence using panel data of ASEAN–8 countries. Journal of Business Economics and Management, 17(5), 717-733. http://doi.org/10.3846/16111699.2015.1114515
Todaro, M. P., & Smith, S. C. (2006). Economic development (9th ed.). Harlow: Pearson Education Ltd.UNCTAD. (2006). World investment report 2006: FDI from developing and transition economies: Implications for development. United Nations: New York.
UNCTAD. (2017). World investment report 2017: Investment and the digital economy. United Nations: New York and Geneva.
Weng, Y., Yang, C. H., & Tu, F. C. (2010). Outward foreign direct investment and product quality of domestic productions: An empirical investigation. Journal of Business Economics and Management, 11(3), 396-414. https://doi.org/10.3846/jbem.2010.19
Wesson, T. (1999). A model of asset-seeking foreign direct investment driven by demand conditions. Canadian Journal of Administrative Sciences, 16(1), 1-10. https://doi.org/10.1111/j.1936-4490.1999.tb00183.x
World Bank databank. (2017). Retrieved from http://databank.worldbank.org/data/
You, K., & Solomon, O. H. (2015). China᾽s outward foreign direct investment and domestic investment: An industrial level analysis. China Economic Review, 34, 249-260. https://doi.org/10.1016/j.chieco.2015.02.006
Zhang, K. H. (2006). Foreign direct investment and economic growth in China: A panel data study for 1992-2004. In Conference of WTO, China and Asian Economies, 24th June 2006 (pp. 1-18). University of International Business and Economics, Beijing, China.
Zhang, Y., Chen, W., & Yang, P. (2011). OFDI impact on domestic investment efficiency: Based on China᾽s experience, in international conference of Machine Learning and Cybernetics (ICMLC), Guilin, China. IEEE, 3, 1279-1283. https://doi.org/10.1109/ICMLC.2011.6016925