The Impact of Foreign Direct Investment on Income Convergence in China - A Spatial Panel Data Analysis

A Spatial Panel Data Analysis

  • Di Zhu Saint Mary's University of Minnesota
  • Yefei Li Johns Hopkins University, USA
  • Ejimofor Bruno Chiedozi Saint Mary's University of Minnesota, USA
  • Hui Pan Shanghai Lixin University of Accounting and Finance, China
Keywords: foreign direct investment, absolute and conditional β income convergence, Solow growth theory, Chinese economy, spatial autocorrelation, spatial econometrics


After taking into account the spatial dependence effects in the panel data consisting of all 31 provinces, direct-controlled municipalities, and autonomous regions in China between the years 1998 and 2017, it found significant spatial autocorrelation effects in both traditional absolute and conditional β income convergence models. At the national level, using the spatial econometric models (Spatial Error Model for absolute convergence and Spatial Durbin Model for conditional convergence), the analysis shows that in the past 19 years from 1999 to 2017, there is no absolute β income convergence. However, there is conditional β income convergence after controlling for all growth factors, while the positive effect of fixed asset investment on regional economic growth is significant, and the effect of population growth is significantly negative. The other growth factors such as FDI inflow, export, and higher education enrollment were surprisingly found no statistically significant effects on regional economic growth. From regional level (Spatial Durbin Model and Spatial Lag Model), there is no conditional β income convergence within each four economic regions. Nonetheless, the northeast region showed an income divergence trend, where only the fixed asset investment is positively significant. This study results imply that China should continue to improve fixed asset investment and control population growth to stimulate regional economic growth and income convergence.


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