A VAR approach to the economics of FDI in China

Using a vector autoregression (VAR) approach, this study re-examines several hypotheses suggested by the economic literature on the economics of FDI applying quarterly time series data from China, a country which has recently become the second largest host country for FDI. Innovation accounting (variance decomposition and impulse response function analysis) is applied to analyse the various interrelationships between FDI and other economic variables of interest in a VAR system. The empirical research using this method in the case of China is limited, the study therefore provides an interesting advance in the literature on the economics of FDI in China.