Foreign Direct Investment and Unequal Regional Economic Growth in China



Empirical evidence for the Chinese regions 1989-1996 thus shows that the rich
regions attract the highest growth in investments. Using the same simple approach for
regional growth rates we get

DGY = .000001525*DY R2 = - .0172 Obs = 232
(0.53)

where the parenthesis indicate t-values.

Although there is unequal investments and the rich regions tend to attract the highest
growth in foreign direct investment there is no obvious unequal growth after the
above used definition as β is insignificant.

Other definitions of equal growth give a result that the actual income has been
developed towards more equal income distribution measured by the following
commonly used methods1: (1) A simple dispersion indices, based on standard
deviation; (2) Gini coefficients and the dissimilarity index; (3) the Shannon entropy
measure; (4) the rank-size function.

The general trend in the standard deviation of relative per capita income among 29
provinces is shown declining, except slightly rising in the years of 1992, 1993 and
1994. (See table 3, column 2, in the appendix 2 which reports the development in
income inequality among the regions in China). The
index for dissimilarity among all
regions in China is likewise declining during 1988-1996, see column 3. The total
inequality measured by
Shannon entropy declines. Column (5) shows the total
inequality (4) as a percentage of maximum inequality which equal to
log N, (i.e.
log(29) = 3.3673). Column (6) and (7) present respectively the coefficient b and R2
value in the rank-size function as shown in appendix 2, formula (3). The trend of b
coefficient is same as for the I-value.

The over-all picture is thus that the Chinese regions over the considered period
became more equal. In general during the economic boom years in 1992-1994, the
total inequality among all regions in China has been increased, but this does not
destroy the picture of growing inter-regional equality.

We, here, have a paradox that unequal investments might lead to equal growth. The
explanation is partly found in equation (2), which in a more developed form transform
change in investment level to economic growth. Therefore, we shall now develop
equation (2) a little further.

4.2 The Income Dependent Multiplier Effects

The basic (annual) growth model is the Keynesian inspired. When the investment
multiplier is dependent on the income level we will have



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