The Role of Foreign Direct Investment on Income Convergence in China after Early 1990s from a Spatial Econometric Perspective

This paper introduces foreign direct investment (FDI) as an endogenous variable based on a neoclassical model of economic growth and investigates the impact of FDI on income convergence in China using provincial panel data from 1991 to 2007. A spatial model is later exploited to further examine the effect of FDI on convergence in China in light of remarkable and positive spatial correlations among neighboring regions. Results of estimates confirm the role of FDI inflow as a significant driving force to promote conditional convergence in China after the early 1990s. They also confirm that the non-spatial classical model underestimates the impact of FDI on regional economic growth and also underestimates the speed of convergence.