Is foreign direct investment an engine of economic growth? Evidence from the Chinese economy

The main objective of this paper is to examine the relationship between FDI flows and economic growth in China and the policy concerns it engenders. The Johnson co-integration method has been used for testing the relationship of FDI function and found that there is a long-run relationship between the variables such as GDP, FDI and change in domestic capital formation (DC). It could be concluded that China's attempt to give a boost to its growth rate with an expansion of foreign trade and investment, which is carried out with a broader strategy of modernization, reconstruction and reforms in 1979 has been successful. It supports the notion that Chinese economy would sustain its current growth rate by not only opening of the economy but also increasing its investment through FDI inflows. The results suggest that China should encourage the Equity Joint Ventures (EJV) through FDI inflows, which is decreasing in recent years. It would increase the domestic capital formation and sustain the economic growth in China. Further, the key sectors like industry and service should be given importance for the careful consideration in the reform process since the strength of the Chinese economy lies with these key sectors