Financial Deepening, OFDI and Economic Growth: Based on the Perspectives of Both China and Host Countries

Abstract

Based on the perspectives of both China (home country) and host countries (economies), a financial deepening indicator system and an economic growth indicator system are constructed, the mutual influence mechanism between financial deepening (FD), outward foreign direct investment flows (OFDI) and economic growth (EG) are studied. Firstly, from the perspective of China, based on Error Correction Model (ECM) and Vector Error Correction Model (VECM), the conclusions received are as follows. (i) China's financial deepening and OFDI have a long-run positive impact on China's economic growth. (ii) Further analysis also confirms that reforms related to financial deepening have positive policy effects on promoting OFDI in China. Secondly, from the perspective of the interaction between China and host countries (economies), based on Time-varying Spatial Durbin Model (TVSDM), the conclusions received are as follows. (i) In general, China's OFDI to host countries plays a positive intermediary role in the process of financial deepening for economic development in host countries. (ii) Three aspects (FD, OFDI, EG) have different degrees of spatial autocorrelation and spatial spillover effects on each other, which are positive in general. (iii) Further analysis also found heterogeneity in the above conclusions for high-income and low-income host countries individually. In a word, a comprehensive analysis framework of three aspects (financial deepening, OFDI and economic growth) is finally constructed, which has important implications for overseas investments and financial support to the real economy.