Academic journal article Contemporary Economic Policy

Spillovers from Taiwan, Hong Kong, and Macau Investment and from Other Foreign Investment in Chinese Industries

Academic journal article Contemporary Economic Policy

Spillovers from Taiwan, Hong Kong, and Macau Investment and from Other Foreign Investment in Chinese Industries

Article excerpt


Since mainland China opened its doors to outside investment in 1979, strenuous efforts have been made to attract foreign investment, resulting in a significant increase in foreign direct investment (FDI) in China. (1) This is manifested by the fact that according to official Chinese statistics, the actual amount of foreign capital invested up to 1999 was US$305.99 billion. Despite a gradual decline in FDI in China from overseas Chinese communities, namely, those of Taiwan, Hong Kong, and Macau (THM), these economies have remained the major source of investment in recent years. Well documented by Dees (1998) is that China's open-door policy has encouraged investment by foreign enterprises and that the resulting growth in FDI is undeniably a primary component of China's current success. The influence of FDI on industrial productivity in China has therefore become an issue of lengthy discussion and a topic of a great deal of industrial economic research.

Take some of the findings presented here as examples of the research that abounds. For one, Sun (1998) indicated that FDI is clearly a potential growth determinant not only in China but also in other developing nations. Meanwhile, with their focus solely on China, Zhu and Lu (1998) confirmed the causal linkage between FDI and the growth in productivity. Along the same lines, Zhang (2001) has also recently demonstrated that FDI seems to have been boosting China's growth in income, thereby facilitating transition in terms of economic development, and they have shown that the positive effects of this growth seem to have been mounting over time and becoming more strengthening in coastal than in the inner regions. Though agreeing that FDI stimulates growth in China, in general, Zhang and Felmingham (2002) nevertheless have recently shown that this is particularly true in all of the eastern, central, and western regions.

Although studies like these have supported the positive role of FDI in China's economic development, none has distinguished the different sources of FDI and the impact the different sources have had on China's economy. To be sure, the investment behavior of enterprises from THM and from other foreign countries (OFCs) are quite different in many ways, such as in the scale of investment, the extent of cooperative operation, productivity, and in the ability to transfer technology. It is thus reasonable to expect that the impact of FDI on China's industries from each of these two sources might be different. Given that China has made tireless efforts to attract more investment from foreign economies, investigating this issue identifies and defines the forms of the contribution made by the different sources of FDI on the one hand. On the other hand, the findings are also most valuable for the government of China as it attempts to set up more effective industrial mechanisms vis-a-vis foreign investment. These benefits aside, the findings of this study supplement the conclusions drawn in previous studies that have dealt with spillovers from FDI in China.

The primary purpose of this article is to identify the differences in the impact of FDI sourced from THM and that from OFC with respect on labor productivity and total factor productivity (TFP) in the industrial sector of China. To explore the primary issue of this study, the official cross-provincial data on Chinese industries covering 1993, 1994, and 1997 provided by the China Industrial Economic Statistical Yearbook (National Statistical Bureau) and the China Statistical Yearbook (National Statistical Bureau) are adopted to examine the following three questions. First, does FDI increase Chinese labor productivity and TFP? Second, what are the differences in the spillover effects of THM investment and of OFC investment? Third, do the spillovers differ within different regions of China?

After the regional labor productivity function and the regional TFP function are regressed, the estimation results make it clear that positive spillovers from THM investment existed only in 1993 and decreased after that and that OFC investment did not have any spillover effects on Chinese industries as a whole whatsoever during the periods studied. …

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