This research study deals with studying the relationship between foreign direct investments an economic growth. Here the country under examination is China. The aim of the study is to find the link of FDI and economic growth using the determinants of economic growth such as exports and sector wise distribution of FDI. China is world’s third largest economy and it’s taking lead in almost every field. The research has shown the trend of FDI in China and it has shown that how much it effects the overall economic growth of the country. Apart from FDI the other independent variables included in the regression of real GDP are exports, inflation, real exchange rate and trade openness on which annual data is collected from 1986 to 2013.

FDI can be shortly described as an investor’s large stake in another firm. FDI is regarded as a matter of great concern in the countries that have focus on importing and exporting countries. There are two sides of this issue, one is that the countries having major exporting concern fear that their own domestic market might get shrink due to capital leaving the domestic market. On the other side countries having major importing concerns fear that due to excess imports the foreign firms might get control of the economy of the country. On the larger scale, FDI is regarded as positive sign.

The methodology used in this research is the analysis of statistical data related to FDI and economic growth i.e. using the secondary data and analyzing it quantitatively. The estimation technique utilized in this dissertation is Ordinary Least Square and Granger causality test. Significant relationship and a two way link between FDI and economic growth is found. Moreover the research approach used was deductive. Hypotheses were developed with the help of theoretical framework made by the researcher. The results are tested and checked and recommendations are postulated out as accordingly. There were few limitations faced by the researcher in the collection of data through secondary sources and time management.

Key Words: Foreign Direct Investment, Longterm Economic Growth, China

CHAPTER 1: INTRODUCTION

1.1.            Foreign Direct Investment

Foreign Direct Investment (FDI) is stated as an investment which is undertaken for a longer time period and shows a long time attentiveness by domestic country or firm into an economy which can be called as foreign direct investor of parent firm FDI demands the investor to put a great effect on managing the firm residing in another economy involving transactions at initial stage as well as at subsequently among two separate bodies (entities) no matter combined or uncombined. In addition to this FDI can also be carried out by single bodies or business bodies. . It has become tripled from 1980s till now and the FDI is increasing rapidly. FDI is growing as an important shift of international capital from last ten years. FDI (Foreign direct investment) has been reported throughout the globe in the past 30 years which has shown mixed results in developed and under developed countries. A significant growth can be seen in foreign direct investment (FDI) which in countries with industrial growth as well as countries which are emerging from last thirty years. FDI is an acquisition of an investor while managing a firm existing in another country and it is normally long term investment which influences the whole firm as well as investors. It is observed that in the world of development both countries that either export their capital or import it have different issues related to FDI. The countries that export capital have serious concerns related to the harmful effects of the exporting capital to the investment in home country. On the other hand the country that imports capital have issues like the legislators or labors shows the risk that the firms in home country may not get under the ownership of foreigners. It is important to study the relationship between foreign direct investment and long term economic growth. There are many factors that need to be studied, many previous researches show results that may or may not apply to all countries and situations. In this study we will study about the relationship between foreign direct investment and long term economic growth in China which is an emerging Asian country.

1.2.            FDI and Economic growth in China

China has successfully organized inner Foreign Direct Investment (FDI). China is achieving 20% of FDI to countries that are in process of development from a decade with the help of utilizing opportunities and growing size of the China’s market. FDI in 2008 reached to