Foreign Direct Investment in China

Foreign investment inflows to China have been remarkable since 1979. By the end of 1989, total inflows reached about US $19 billion. Direct investments (FDI), including equity and contractual joint ventures, oil exploration and, wholly foreign-owned enterprises (WFOEs), have accounted for over 80 percent of these inflows, while other investments such as leasing, compensation trade, and processing and assembling accounted for the remaining 20 percent. This strong performance reflects the success of the open-door policy the Chinese government has been pursuing since the late 1970s, particularly the specific policies and measures adopted to encourage foreign investment.

China's efforts to encourage foreign investment inflows started in 1979; however, large foreign investment inflows did not occur until 1984. From 1979 to 1982, FDI inflows were relatively small, amounting to approximately US $1.2 billion (Table 5.1). In particular, equity investment was insignificant, accounting for less than 10 percent of total FDI inflows (Figure 5.1). Direct investment concentrated largely on contractual joint ventures and oil exploration activities (46 and 42 percent, respectively). For other investments, the bulk of inflows occurred in the form of compensation trade, which accounted for about 95 percent of total investment activities. Initially foreign investors perceived the market risk as high due to the newly opened market and economy. Therefore, investors preferred to wait for the market conditions to become more certain before making investments. Second, although the basic joint venture law on equity investment was promulgated in 1979, detailed investment regulations re

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