Academic journal article China: An International Journal

Facts about and Impacts of FDI on China and the World Economy

Academic journal article China: An International Journal

Facts about and Impacts of FDI on China and the World Economy

Article excerpt

The largest recipient of foreign direct investment (FDI) among all developing countries, China received a cumulative total of USD854 billion in FDI from 1979 to 2008 and benefitted tremendously from both tangible and intangible assets associated with FDI inflows. In fact, in the modern history of economic development, no other country has ever benefitted, and continues to benefit, from FDI as much as China. There is a consensus among academic scholars specialising in the Chinese economy that, over the last three decades, FDI has been a critical engine driving the Chinese economy. In literature pertaining to the growth of the post-reform Chinese economy, and policy discussions about China's successful transition towards a market-oriented economy, FDI has always been one of the focal points.

The influx of FDI greatly alleviated the severe shortage of capital at the start of China's economic reforms and substantially facilitated its capital formation process. Through contributions to capital formation and growth of total factor productivity (TFP), FDI in China contributed directly to China's sustained high economic growth since the beginning of the economic transition in 1978. It is estimated that foreign-invested firms accounted for about 40 per cent of China's GDP, and without FDI, China's GDP growth would have been 3.4 per cent lower.

Moreover, foreign-invested firms have performed an essential role in promoting China's exports. Switching from an inward-looking development policy to an export-led one represents one of the fundamental dimensions of China's economic reforms. This strategy has been very successful. China's exports grew rapidly and reached USD1,429 billion in 2008. Looking at Chinese export data by producer type reveals that foreign-invested firms have been the major contributor to the drastic export expansion. They accounted for almost 55 per cent of China's total trade. Today, made-in-China products are available around the world and are increasingly taking larger percentages of market share. However, most of these products are sold under brand names owned by foreign firms or distributed directly by large foreign retailers such as Wal-Mart and K-Mart. Few carry brand names owned by indigenous Chinese firms. It is the technologies, product designs, brand names and distribution networks of multinational enterprises (MNEs) that have removed hurdles to made-in-China products, helped these products enter the world market and strengthened the competitiveness of Chinese exports.

FDI has also facilitated structural changes and enhanced the value-add of Chinese exports. For instance, 85 per cent of Chinese high-tech exports were produced by foreign-invested firms in China. In 2005, China's intra-industry trade with Japan increased to 34 per cent of the total trade from less than six per cent in 1980. Japanese-affiliated manufacturers in China contributed substantially to the rising intra-industry trade.

The presence of foreign-invested firms, either wholly foreign-owned or Sino-foreign joint ventures, intensified the competition in China's domestic market, improved the efficiency of the economy, and propelled state-owned enterprise (SOE) reform and China's transition to a market-oriented economy. Technology transfers and spillovers associated with FDI inflows have substantially facilitated technological innovations and the productivity growth of Chinese firms, thus enhancing their efficiency and competitiveness.

While FDI has been promoting the growth and reshaping the structure of the Chinese economy, it has also affected the welfare of other countries, which are either competing with China for limited FDI, or are sources of FDI. Given the huge size of the Chinese economy and relatively large scale of FDI flowing into China, the potential impacts on other economies raise serious policy debates. For countries trying to attract FDI, for instance, major concerns arise over whether China's gains in FDI are at the expense of these countries and whether FDI flowing into China crowds out that going to other countries. …

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