Foreign Direct Investment and Unequal Regional Economic Growth in China

The ability to attract increasing investment to the region thus must increase at an
increasing rate of DY in order to maintain equal growth rates over the regions.
Equation (13) thus can explain the paradox of unequal investment growth and equal
growth rate.

4.3 The Spill-Over Effect

The spill-over effect is indicated in the following way

GY = α₀ + a₁GI + a₂GI₂                            (14)

where

GI₂ - the growth in investments in the neighbor regions

The spill-over-multiplier is based on empirical evidence formed as

«2 = β10 ⁽«10 ^- «11^DY)(«10 ^- «11DY2)                             ⁽¹⁵⁾

β₁₀ expresses the effect of the distance to the neighbor region. Because the
regions in China are quite similar in geographical and population size (compared to
e.g. the European countries) all distances to neighbor regions (considered as points)
are here assumed to be the same. The term

(C⅛o ^- «11^DY)(«10 ^- O11DY2)

indicate that the multiplier effect from the neighbor region depends on the income in
the region who receive the investments and the income in the region who receive the
spill-over effect.

The model for calculating β is now

GY = α₀ + a₁GI + a₂GI₂                             (17)

GI = γo + γ₁ DY                                 (18)

a₁ = аю ^- a_uDY                               ⁽¹⁹⁾

¾ = β10 (ɑɪo — a_uDY)(θ1o — a_uDY₂)                        (20)

If the neighbor income is assumed to be the average income DY₂ = 0 we have

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