Causal links between foreign direct investment and trade in China

This paper examines the causal relationship between foreign direct investment (FDI) and trade (exports and imports) in China. The empirical study is based on a panel of bilateral data for China and 19 home countries/regions over the period 1984-1998. Econometric techniques for panel data are applied to test unit roots and causality. The results indicate a virtuous procedure of development for China: the growth of China's imports causes the growth in inward FDI from a home country/region, which, in turn, causes the growth of exports from China to the home country/region. The growth of exports causes the growth of imports. The results have important policy implications.