The Dynamic Relationship between Foreign Direct Investments and Domestic Investment: A Multivaritae Analysis

Abstract: China’s opening of reform in 1979 started the transition to a social market economy in 1992 and its accession to the WTO in 2001 are seen are pivotal moments in China’s recent history when assessing its economic growth and investment climate in the last 30 + years. Some theorists (Kokko 1994; Cave 1974) propose the positive spillover effects of FDI however its merits have been called into questions by other theorists (Bornschier & Chase- Dunn 1985; Aitken & Harrison 1999), suggest FDI is seen to crowd out rather than crowd in domestic investment. The lack of consensus on the effects of FDI on the host country can be attributed to the different modeling strategies, time period or lack of time dimension as well as the country assessed. Through as assessment of the literature and motivated by the locational advantages of the host country, the IMCD paradigm was created to represent the investment climate, macroeconomic conditions, cost related factors and development strategies to understand the relationship between domestic investment and FDI and how the additional factors interrelate with each other in a multidimensional paradigm. The methodology of the study is based on the Vector Error Correction (VEC) and Vector Autoregressive (VAR) model in order to analyze a long run and short run dynamic relationship.