What Drives Foreign Direct Investment Inflows in China? ARDL Bound Tests and ECM Approach

Abstract

This paper examines the variables that drive foreign direct investment in Chinese economy. Recent past studies have shown conflicting results which make further study on this subject matter imperative in the recent times. Data were collected from the United Nations Conference on Trade and Development and World Bank Indicator from 1990– 2017 and the study employed the Autoregressive Distributed Lag (ARDL) model and Error Correction Model (ECM) to address its objective. Consequently, the major findings that originated from the work could be submitted as follows. The result of ECM term confirmed that about 19% of the total disequilibrium in the previous year would be corrected in the current year. Meanwhile, the principal drivers of FDI inflows in China are the large market size and impressive growth rate of the economy. However, GDP per capita could not derive FDI inflows in China. Based on the findings that emerged in this work, it is mandatory this paper makes these recommends for both the policy makers and the future researchers in China that whenever sporadic inflows of FDI is the target of the policy makers in this country, the Chinese government should manipulate the market size and growth rate of its economy.&nbsp