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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. [ABSTRACT FROM AUTHOR]

It is widely held that foreign direct investment (FDI) has a positive effect on economic growth. To test this hypothesis, we perform convergence regressions derived from a theoretical model on the impact of FDI on endogenous technological change in small economies. The model includes FDI externalities that enhance growth, but also shows that FDI can crowd out host country income and reduce local innovation. The empirical analysis employs disaggregated US data for various FDI-related activities—in addition to the conventionally used aggregate FDI stocks and flows. We estimate the net FDI impact on the convergence rate of per-capita income to US levels, controlling for human development, financial development, and trade. We find that FDI accelerates convergence for high-income countries only, otherwise slowing it down. [ABSTRACT FROM AUTHOR]