Foreign Direct Investment and Unequal Regional Economic Growth in China

DGY = (α_wγι - a_nγo ^- βιoa_na_wγo)D^{γ -} a_nγιDY²

Equal growth as a function of γ₁ is found by solving

(«10Ï1 ^- «11Ï0 ^- β100⅛1O10Y0pY ^- «11Y1DY2 = ⁰                    (²²)

The condition for the equal regional growth at an unequal distributed DFI for the
given “aggregate” consumption function is now given by

Υ1 = ( O11Υ0 ⁺ P10«11«10Y0^)/( «10 ^- «11DY)                        (²³⁾

The ability to attract increasing investment to the region thus also here must increase
at an increasing rate of DY in order to maintain equal growth rates over the regions,
however, when the spill-over effect is included the level of ability to attract increasing
investment must be even higher in the richer regions. Equation (23) is thus more
strongly than (13) in underlining the possibility of unequal investment growth and
equal growth rate.

The Chinese growth process was heavily disturbed in 1988 and 1989, due to the
political instability coming from the transformation process in the Soviet Union and
Eastern Europe and internal instability from the Tien-An-Min event. Therefore a
dummy was introduced to catch this depression, DUM89.

The final model for the impact of direct foreign investment in China on the growth
rate became

GY1 = «00 + ( α_w - a_nDY)GI1

+ β₁₀ (a₁₀ - a₁₁DY)(a₁₀ - a₁₁DY₂)GI₂ + o⅛DUM89                     (24)

4.4 Alternative Growth Models

If the multiplier is decided by the absolute income instead of the relative income we
will have

GY1 = β00 + ( β01 + β11Y1)GI1

+ β10(β 01 + β11Y1)( β01 + β11Y2)GI2 + β3 DUM89                       (24a)

where Y₁ and Y₂ are the absolute income in the region and in the neighbor region
respectively.

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