This chapter assesses the impact of direct foreign investment (DFI) on domestic capital formation, economic growth, industrial production, and employment in China for the period 1979 to 1996. DFI can affect the total capital formation of the host country in various ways. As a source of foreign capital inflow, DFI can augment total financial resources available for investment, thereby promoting capital formation in the host country. DFI can also stimulate domestic investment through industrial linkage effects, i.e. buying locally made inputs from, and providing intermediate inputs to, local firms. Worldwide, there are several studies on the effect of DFI on domestic investment and economic growth in host countries. The hypothesis to be tested is that DFI positively influenced gross domestic product growth and domestically-financed investment of China. The regression analysis indicates that DFI positively influences domestically financed investment in China.