For the developing countries involving in the Belt and Road Initiative (BRI) with China as the main source of foreign development investment (FDI) and development as the top priority, it appears to attract more and more attention on how to make the best use of China’s outward foreign development investment. However, the contradictory evidence in the previous studies of FDI spillover effect and the remarkable time-lag feature of spillovers motivate us to analyze the mechanism of FDI spillover effect. The paper aims to discuss this issue.
The mechanism of FDI spillovers and the unavoidable lag effect in this process are empirically analyzed. Based on the panel data from the Belt and Road developing countries (BRDCs) and China’s direct investments (CDIs) from 2003 to 2017, the authors establish a panel vector autoregressive model, employing impulse response function and variance decomposition analysis, together with Granger causality test.
Results suggest a dynamic interactive causality mechanism. First, CDI promotes the economic growth of BRDCs through technical efficiency, human capital and institutional transition with combined lags of five, nine and eight years. Second, improvements in the technical efficiency and institutional quality promote economic growth by facilitating the human capital with integrated delays of six and eight years. Third, China’s investment directly affects the economic growth of BRDCs, with a time lag of six years. The average time lag is about eight years.
Based on the analysis on the mechanism and time lag of FDI spillovers, the authors have shown that many previous articles using one-year lagged FDI to examine the spillover effect have systematic biases, which contributes to the research on the FDI spillover mechanism. It provides new views for host countries on how to make more effective use of FDI, especially for BRDCs using CDIs.
No potential conflict of interest was reported by the authors. Data analyzed in the study are collected from public sources. This research was funded by the General Project of the National Social Science Foundation of China. Project Name: Research on the mechanism of credit bubbles governance under the dual pillar regulation framework of monetary policy and macro-prudential policy. Project Number: 18BJY236. This work was supported by the General Project of the National Social Science Foundation of China (NSSFC). The corresponding author wishes to thank NSSFC for the scholarship that made this research possible.
Zhang, Y., Cheng, Z. and He, Q. (2019), "Time lag analysis of FDI spillover effect", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-03-2019-0225Download as .RIS
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