Capital Flight and Foreign Direct Investment

Abstract

To systematically study the relationship between foreign direct investment inflow (FDI inflow) and capital flight, this chapter uses yearly-data in 1984-2012 in China, sets up two propositions and applies our model to explore the micro-relation and macro-relation between FDI inflow and capital flight.At proposition (4-1), we can find that the estimated values of long-term foreign direct investment inflow (FDI inflow) and long-term capital flight are significant correlation. Then, under Augmented Dickey-Fuller test (ADF test) or Philips-Perron test (PP test), the residuals reject the null hypothesis with statistical significant at 5% level, which implies that the result is stable. Causal test also shows that the relation between FDI inflow and capital flight is Granger causal. Besides, results of error correction model (ECM) show that FDI inflow and capital flight, they are not only have the long-term positive relation, but also have short-term dynamic relationship. So we can find the proposition (4-1) is true.At proposition (4-2), at first, we can find that the estimated values of long-term FDI inflow and long-term export are obviously correlated with statistical significant at 1% level, the R square value reaches highly level at 0.9, and they imply the model is good to fit. Next, results of error correction model show that FDI inflow and export, they are not only have the long-term positive relation, but also have short-term dynamic relationship. So we can find the first part of proposition (4-2) is true, which means that if FDI inflow increases, export will grows, too.Finally, for the remainder of proposition (4-2), at first, we can find that the estimated values of long-term capital flight and long-term export are obviously correlated. Then, under ADF test or PP test, we can find the remainder of proposition (4-2) is true, which means that if export grows up, capital flight will increase, too. In short, FDI inflow increase, export will grows apparently, capital flight will increase obviously which will attract more FDI inflow.