Foreign Direct Investment and Unequal Regional Economic Growth in China

The relationship between the relative growth rate and relative income can thus be
calculated in two ways: by estimating (24) and (31) and using equation (33) or by
estimating (35) directly.

6. THE ESTIMATIONS AND SCENARIOS

6.1 The Model for the Attraction of Investments

The above model (31) for change in investment level is now estimated by WLS as

GI = .0040914 - .0027593Y² - .0011928Y³ - .0001704Y⁴ + 7.927e-06Y⁵

(4.21)      (-6.07)         (-6.89)      (-7.33)        (7.52)

+ (3.41e-05 - 3.92e-05Y +1.62e-05Y² - 3.07e-06Y³ +2.72e-07Y⁴ - 9.21e-09Y⁵)DY

(2.49)    (-2.54)       (2.52)      (-2.44)      (2.33)      (-2.23)

- (.004091 + .032782Y - .016265Y² + .003758Y³ - .000400Y⁴ + 1.588e-05Y⁵)DY²

(-1.77)      (2.01)       (-2.30)      (2.62)        (-2.92)        (3.18)

R² = .6863 Adj.R² = .6630 Obs = 232

Year, Y, takes the values 1 - 9 for the years 1988-1996.

The estimated GI-function is shown in figure 1.

6.2 The Investment-Growth Model

The equation for the growth rate as a function of the growth in direct foreign
investments is estimated to

GY1 = .09117 + (8.3743 -.0008348DY1)*GI1

¹ (21.61) (5.09)      (-1.97) ¹¹

+.0367* (8.3742 -.0008348DY₁)*(8.3742 - .0008348DY₂)*GI₂

(1.24)   (5.09)   (-1.97)   ¹   (5.09)    (-1.97)    ²²

- .1606*DUM89

(-15.20)

R² = .6046 Adj.R² = .5976

All signs are as theoretically expected. The coefficients of the neighbor regions are
insignificant, however, highly plausible (see also appendix 4 for alternative
estimations).

The change in investment level will change the equilibrium income. Normally it is
expected to happen over more than one year. The data, however, showed no time lag
in the adaption. This could indicate that the friction in the regions is close to zero
possibly due to “unlimited” accession to qualified labor force.

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