The impact of foreign direct investment and human capital on economic growth: Evidence from Chinese cities

- There are large variations in per capita income growth, human capital accumulation, and foreign direct investment (FDI) across Chinese cities.
- Using the Solow framework we find that human capital and FDI are important contributors to economic growth in Chinese cities.
- One way that human capital contributes to economic growth is working as a facilitator for technology spillovers associated with FDI.
- We find suggestive evidence that the complementary relationship between human capital and FDI is stronger for technology- and capital-intensive FDI than for labor-intensive FDI.

Using a panel of Chinese cities over the period 1991-2010, we examine the determinants of economic growth, focusing on the role of foreign direct investment (FDI) and human capital. Consistent with the predictions of a human capital-augmented Solow model, we find that the growth rate (along the path to the steady-state income level) of per capita GDP is negatively correlated with population growth rate and positively correlated with investment rate in physical capital and human capital. We find that FDI has a positive effect on the per capita GDP growth rate and this effect is intensified by the human capital endowment of the city. The latter suggests that one way that human capital contributes to growth is to serve as a facilitator for technology transfers stemming from FDI. Furthermore, we find some suggestive evidence that the FDI-human capital complementary effect is stronger for technology-intensive FDI than for labor-intensive FDI. Our results are robust to alternative measures of human capital, model specifications, and estimation methods.