RELATIONSHIP BETWEEN INWARD FOREIGN DIRECT INVESTMENT, DOMESTIC INVESTMENT, FORMAL AND INFORMAL INSTITUTIONS: EVIDENCE FROM CHINA

This study examines relationship between Inward FDI and domestic investment in China, using co-integration and Granger causality analysis (Including bivariate and multivariate Granger causality models). We have used auto-regressive distributed lags(ARDL) econometric methodology technique to define relationship between inward FDI and domestic investment using time series data for China. Our study examines long run effects of FDI inflows on domestic investment over time span 1990-2014 for China using informal, formal institutions and key macroeconomic variables as control variables in the model. The results suggest that conclusions drawn from bivariate model may not be valid because of omission of important control variables. Our results of multivariate model show that there is positive unidirectional causality running from IFDI to DI in the long run. In the short run, both inward FDI and domestic investment do not allow Granger causality.