INTRODUCTION

Despite its fast economic growth in the past thirty years, China still faces the problem of regional disparity. While the east has a much more energetic and developed economy than the west, the middle is somewhere between them. Generally, in the east, the middle or the west, there is a significantly positive relationship between capital formation and economic growth. In the meanwhile, the development of the economy has improved the environments for capital formation. However, the inadequate capital formation ability of the west is the key factor restricting the development of its economy, so the improvement of its capital formation ability will help reduce the regional disparity. This chapter will analyse the ability for capital formation and its impact on regional economic development in the west and compare it with the east and the middle.

This chapter is related to studies that analyse the relationship between FDI and economic growth. Zhong (2000) showed that there was indeed a relationship between FDI and the economic growth in certain provinces. However, FDI was not the most significant variable that influenced economic growth; in addition, he found that the impact of FDI on the economy was decreasing from the coastland to the middle and the west. Sang (2002) found that FDI did prompt economic growth but its role was limited. Wu and Chen (2003) stated that FDI was the important factor that influenced economic growth through technology spillover and network effect of regional innovation. Zhang (2004) used the data of twenty-eight provinces from 1984 to 2002 to analyse the influence of FDI on Chinese economic growth. He found that the elastic coefficient of FDI to economic growth was 0.02–0.03, that is, if the FDI increased by 1 per cent, the economy would increase by 0.02–0.03 per cent. Du (2004) demonstrated that the external capital formation ability in terms of FDI played a positive role in economic growth, and the growth of the Chinese economy was one of the major reasons for the increase of the FDI.