The Role of Foreign Direct Investment in Sustaining China's Economic Growth

By Bâlgar, Ana-Cristina | Global Economic Observer, July 1, 2015 | Go to article overview

The Role of Foreign Direct Investment in Sustaining China's Economic Growth


Bâlgar, Ana-Cristina, Global Economic Observer


1. Introduction

The paradigm change and the gradual evolution of the national policies and legislation concerning the inflow of foreign direct investment (FDI), from restrictive to passive attractive and then to approaches that promote active selection and encouragement of FDI inflows, have made foreign investors a primordial driver for China's economic growth, for its technological and industrial development, and also a beneficial factor for the creation and preservation of a dynamic competitive environment (Chunlai, 2011). As such, if in the beginning, in the starting phase of reform programmes launched in 1979,13 the main objective of attracting foreign capital was the deficit of local capital and the stimulation of foreign trend in order to speed up transition and economic development, at present, China is seeking increased competitiveness by enabling market access for its main foreign competitors and thus the improvement of the national economic climate (Sussangkarn et. al, 2011).

As a result, due to the continuing progress of reform and economic openness, in conjunction with the huge market potential, the relative low labour cost and the increasingly comprehensive policy encouraging foreign investment applied by the national authorities in recent years, FDI inflows have increased at an accelerated pace, and China is now the first main beneficiary of FDI worldwide (overcoming the U.S. in 2014, which had held the position up to then)14 and the second destination of FDI targeting developing countries, after Hong Kong (UNCTAD, 2015).

Also, if until 2000, due to legislative impediments that aimed at restricting outward direct investment (ODI), China was not in a favourable position in the hierarchy of world investors (Rosen&Hanemann, 2009), upon the beginning of the new millennium, the national authorities started implementing an initiative encouraging local companies to invest outside the country, by adopting a new "going global" strategy" 15 (Hong&Sun, 2004). Given China's unmatched economic performances the recent decades due to the "targeting" of newly designed outward orientation, the Chinese Government saw the necessity of affirming the country's economic profile at international standards but also of conquering other outlets for local production which would implicitly contribute to acquiring new skills, advanced technology or high-value intangible assets (management and organisational transfer, trademarks, etc.) (Bellabona&Spigarelli, 2007). Furthermore, the launch of this Government initiative also took into account the perspective of reducing the high trade surplus that China constantly registered during the years preceding the launch of the reforms. According to specialists (Palley, 2006; Williamson, 2005), FDI stimulation was able to restore the domestic balance, in the sense that the speeding up of exports as a policy supporting growth, corroborating by a fixed exchange rate and increased control on capital movement, as well as the gradual opening of the national economy contributed to the accumulation of trade surplus and huge foreign currency reserves, which generated pressure on the exchange rate and tensions among the main trade partners (Otani, 2005).

Therefore, this recent policy that encouraged orientation towards foreign markets determined Chinese firms to redirect their multinational activity, because of reasons that are related to obtaining access to new resources and technologies or in order to expand the scope of their competitiveness in the global economic landscape.

The new strategic directions have generated both an unprecedented amplification of China's outward investment flows16, but also geographic and sectoral diversification, as now, outward investments are no longer limited to state enterprises but, to an increasing degree, they have extended to the increasingly dynamic private sector (Davies, 2013).

2. Foreign direct investment - a supporting factor for China's growth

As the literature points out (Davies, 2013), over the recent decades, foreign direct investment has been considered by economic analysts and decision-makers as representing both a fundamental driver for the globalization process, and a "catalyser" of economic growth and development. …

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