Overview Of Foreign Direct Investment In China Economics Essay

Over the last decades, for the Chinese growth the FDI has been an important engine. Even though, across the Chinese region there is a big diversity in FDI patterns. For example, the 80 percent of total FDI distributed in the five special economic zones. While the collective five provinces accounts for only 10 percent in the North-West. Furthermore, there are different regions attract different type of FDI. For example the market seeking FDI are increasingly attracted by urban growth centre, on the other hand other regions are the industrial unit of the world. Undoubtedly, an internal discrepancy in economic growth is explained by the foreign direct investment throughout the regions. The economy of china is ten times larger than it was in 1978 and growing at the rate of 10 percent per year. The results of which there are two important dimension of this growth, one is rising of income gap and emergence of large middle class. The gaps between the coastal areas and the inland that have increased in the reform period of the last few decades. The coastal areas have done extremely well because of the growing importance of foreign trade; most foreign trade involves production and workers along a narrow strip along the coast, particularly Pearl River Delta and the Yangtze Delta, the area from Shanghai up the Yangtze River and a little bit in the northeast. Normally these areas are the major participant in international trade, through a big demand for labour, and incomes in these areas have gone up speedily. The most important, even in the urban sector is the rising gap among skilled and unskilled workers. In addition during the Maoist era, there was a strict wage structure. The diversity between highly paid and relatively low-paid workers was humble. But during the development period, this wages configuration has become marketized, and for the people with skills, whether managerial or engineering, the price has been tender up dramatically. For the unskilled labour the entry-level wage, has been remain relatively flat.

From the beginning of the reform period China’s dissimilarity was significantly less than most countries for example compare to India or the East and Southeast Asian countries. But nowadays its degree of income dissimilarity is approximately the same as that in India and certain Latin American countries which are famous for a high degree of income inequality.

2.2 FDI policies in China

One of the most important key elements of China’s economic reform process has been the support of foreign direct investment. From the late 1970s, for foreign businesses china has progressively opened its economy and in this way attracted large amount of direct foreign investment. Mean while, the policies of china toward FDI as well experienced a variety of changes on their policy priorities.

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While in late 1970s and early 1980s, government policies are categorized by surroundings new rules to permit joint ventures using foreign capital and setting up Special Economic Zones (SEZs) and ‘Open Cities’. During the second conference of the Fifth National People’s Congress in July 1979, The Law of the People’s Republic of China on Joint-Ventures using Chinese and Foreign Investment was adopted, yielding foreign investment a official status in China. The State Council also awarded privileges of autonomy in foreign deal to Guangdong and Fujian Provinces and in 1980 set up four unique Economic Zones (SEZs) in Shenzhen, Zhuhai, Shantou, and Xiamen. In December 1982, the assessment to open up China to the world economy was officially incorporated in the 1982 state foundation adopted by the Sixth National People’s Congress. In the late 1983, policy for the carrying out the Law of the People’s Republic of China on Joint Ventures using Chinese and Foreign Investment was formulated in 1983 to promote relax domestic market and to simplify the business environment for foreign joint ventures.

Since 1984, China has also motivated to additional open up the country to FDI. In 1984, the idea of SEZs was comprehensive to an additional fourteen coastal cities and Hainan Island (became a province and the fifth, the largest SEZ in 1988). Twelve of the fourteen cities were chosen Technology Promotion Zones in 1985 to speed up transmit of technology. In 1985, growth triangles the Yangtze River delta, the Pearl River delta in Guangdong, and the Min Nan region in Fujian, Liaodong and Shandong Peninsulas, and the Bohai Sea Coastal Region were as well opened to foreign investors. In 1990, the Pudong District of Shanghai was nominated as a new advance zone to lead improvement alongside Yangtze River.

In 1986, more encouraging policy and provisions are used to promote FDI inflow, particularly export-oriented joint ventures and joint ventures using highly developed technologies. On October 11, 1986, the State Council promulgated the requirements of the State Council of the People’s Republic of China for the support of Foreign Investment. These so-called ’22 Article requirements’ provided foreign joint ventures with favoured tax treatment, the liberty to import inputs such as materials and equipment, the right to retain and swap foreign exchange with each other, and simpler licensing actions. Extra tax profit was open to export-oriented joint ventures and those employing sophisticated technology. The government also attempted to guarantee additional the independence of joint ventures from external interfering interference, to remove many unreasonable local costs, and to provide another tradition for joint ventures to balance foreign exchange. Restricted admittance was provided to supplies of water, electricity and transportation (paying the same price as state-owned enterprises) and to interest-free RMB loans.

The significance of the 1986 requirements is that it provided incentives for FDI intead of simply permitting it, and this more happy approach was furthered by the approval on April 12, 1986 of the Law of the People’s Republic of China on Enterprises Operated Exclusively with Foreign Capital at the fourth Session of the Sixth National People’s Congress. This clearly linked the enterprise of completely foreign-owned enterprises to the development of China’s national economy, and requisite such enterprises either to be exported-oriented or to use sophisticated technology and equipment. The more moderate approach was furthered by the April 1990 Amendments to the 1979 Joint Venture Law. These amendments officially recognized non-Chinese to act as Chairman of the Board of Directors, authorized extensions to the terms of function of joint ventures, and isolated the upper limit to the percentage of the registered funds (minimum not less than 25%) contributed by the foreign partner.

China’s practical policies toward FDI resulted in rising inflow of foreign capital in the late 1980s and especially in early 1990s. From the mid 1990s, although maintaining constructive environment for foreign businesses, government policies began to focus extra on linking FDI encouragement to domestic industrial objectives. In April 1994, the State Council outlines new proposals to draw FDI into the agriculture, hydropower, communications, energy and raw material sectors through encouraging tax policies and discriminatory financial support. In November 3, 1994, the State Administration for Industry and Commerce and the Ministry for Foreign deal and financial collaboration issued a Circular on Issues relating to reinforcement the Examination and authorization of Foreign-funded Enterprises. This tightened the measures concerning the approval of contracts and the registration of foreign enterprises, and improved the penalties if agreements were not fulfilled.

The temporary Guidelines for Foreign Investment Projects took cause on June 27, 1995. Main concern was given to foreign direct investment in the agriculture, energy, transportation, telecommunications, basic raw materials, and high-technology industries, and FDI projects which could take benefit of the rich natural resources and moderately low labour costs in the central and northwest regions were to be strongly encouraged. The Guidelines fixed that the Guiding Catalogue of Foreign Investment Projects was to supply the source for the examination and approval of FDI projects, which were to be classified to one of four categories: encouraged, Restricted, Prohibited, and Permitted.

Incorporated in the encouraged projects were those in infrastructure or underdeveloped agriculture; those with new/advanced technology which could upgrade product function, save energy and raw materials, develop economic efficiency, or manufacture under-supplied new equipment/materials to persuade market demand; those which were export-oriented; those which involved new technology/equipment which made use of natural/regenerative resources and prevented/controlled pollution and so on. Some projects were classified as confidential such as those whose technologies had been developed or transferred, and those where construction exceeded domestic requirement; and those under testing by the State, and those occupied in the investigation of rare and valuable mineral resources. The third type is the so-called ‘forbidden’ projects. These are projects that jeopardized national security or damage the public interest; spoilt the environment, natural resources or human health; those which used substantial amounts of arable land or were unfavourable to the protection and improvement of land resources, or endangered the security and implementation of military services; and so on. Projects that are not in any of the above groups are known as permitted.

Inward FDI: From the time when it launched the economic reforms and called for foreign investment membership in its economy in 1979, China has received a large part of worldwide direct venture flows. China has become the second biggest FDI beneficiary in the world, after the United States, and the leading host country along with developing countries. China’s situation as a host to FDI is in fact moreover far separated from any other developing country – and generally developed countries – to be equalled. In support of twenty years (1979-1999), authentic FDI inflows addicted to China from 1979 to 1999 amounted to US$306 billion, which is comparable to 10 percent of universal direct investment and regarding 30 percent of the venture quantity for every developing country locate collectively.

The Chinese FDI trends can be illustrated depends on changes in policy guidelines – first phase is from 1979-83, second phase is from 1984-91, and third phase is from 1992-99.

First phase: In this phase Chinese government recognized four singular Economic Zones (SEZs) in Guangdong and Fujian provinces, and presented particular encouragement policies for FDI in these SEZs. Whereas FDI inflows addicted to China were very much intense in these SEZs, the quantity was fairly restricted. The overall inflows of realised FDI throughout these 5 years amounted to only US$1.8 bn, which is averaging a US$360 million per annum.

Second phase: While 1984, when Hainan Island and fourteen coastal cities crosswise ten provinces were opened, in the past recorded reserved FDI levels started to take off. Whole FDI inflows amounted to US$10.3 in the 1984-88 periods; by means of yearly standard of US two billion. The expansion tariff of FDI inflows into China goes down at insufficient 6.2 percent intensity in 1989. Although FDI started to continue its development path in 1991, the yearly expansion rate for this whole stage was lowered to 11.0 per cent, which paled in association to 38.1 percent throughout 1984 to 1988.

Third phase: this phase started in the mechanism of 1992, while Deng Xiaoping circuited China’s southern coastal areas and SEZs. After his trip, this intended principally to drive China’s generally economic development method forward and to underline China’s assurance to the open door policy and market-oriented financial transformation, proved to be a accomplishment in garnering the buoyancy of foreign investors in China. China adopted innovative approach, which turned missing from extraordinary regimes toward additional nation-wide operation of open policies for foreign direct investment. The grades were significant: while 1992 the inflows of FDI addicted to China have accelerated and reached the height stage of US$45463 million in 1998. In 1999, chiefly because of the collision of the Asian financial crisis and the grow of achievement transactions in mutually OECD and non-OECD countries, FDI inflows addicted to China dropped to US$40 398 million.

The information on FDI outflows vary. In accordance with China’s BOP data, the collective total during 1990 to 1997 was US$18.9 billion, consisting entirely of equity capital. From the 1980s, China has been quick acquiring resources from abroad. Researchers approximate that the total Chinese FDI in Hong Kong was US$20-30 billion by the end of 1993 or 1994. Actually the net capital of Chinese affiliates overseas can be calculated in hundreds of billion dollars. Legitimately, the Chinese SOEs had as many as 5,666 affiliates overseas at the end of 1998 by means of a collective FDI of US$6 billion.

Source countries – As the size of FDI source countries in China is moderately huge, a handful countries account intended for the sums invested. As a single investor Hong Kong comes first and the recently industrialised economies have been the chief investors as a group. Four ASEAN countries (Thailand, Philippines, Malaysia, and Indonesia) have significantly increased their existence in China from the early 1990s. Along with the developed countries, Japan and the United States have been the main investors in China. The other urbanized countries have made moderately small amounts of venture in China, although they have exposed an growing interest in China in current years. The target of outward FDI is Hong Kong which is the chief objective of Chinese external FDI. Comprehensive and consistent data are not available for an prolonged investigation of this matter.

2.3.4 The geographical and Sectoral distribution of FDI in china

The geographical distribution: The patterns of FDI in China illustrate a vast inequality between regions. During the period from 1983 to 1998, FDI in the eastern section took up 87.8 percent whereas the middle section attracted 8.9 per cent and the western section attracted only approximately 3 percent. This disproportion stems from the FDI policies taken by the Chinese rights. The open door has started with the establishment of exceptional economic zones (SEZs) and there is a special regimes for fourteen coastal cities. This has resulted in disturbing absorption of FDI in the east. By means of the approval of new broadly-based economic reforms and especially in the 1990’s open door policies for FDI, FDI inflows into China have taking place to spread to other provinces. Amongst the eastern section provinces, the performance of Guangdong’s in attracting FDI has been exceptionally remarkable. The share of accumulated FDI of the national total stock was 29.4 percent from 1983 to 1998, higher than all other provinces with Jiangsu and Fujian, each of which possessed roughly 10 percent of the nationalized total, and ranked 2nd and 3rd among China’s 30 provinces. On the other hand, if we examine this province group one stage more, we discover that the shares of every region have progressively changed. In the 1990’s the share of Guangdong has dropped from 46.13 percent in the 1980s to 27.98 percent. But contrast to this, the other coastal provinces shares, such as Fujian, Jiangsu, Zhejiang, Tianjin, Shandong, and Hubei, have increased gradually. The share of the middle provinces in the national sum accumulated FDI stocks has augmented steadily from 5.3 percent throughout the 1980s to 9.2 percent throughout the 1990s. The most important contributors are Henan, Hubei, and Hunan regions, and their shares of accumulated FDI in the nationalized sum twice from the 1980s to the 1990s. These data recommend that the provincial allocation of FDI inflows has spread fairly since the opened coastal provinces into the central provinces. The very small amount of FDI inflows are received by western less developed provinces. Their share in the national accumulated FDI stocks has been declining from 4.7 percent in the 1980s to 3.2 per cent in the 1990s. On the other hand, Sichuan and Shaanxi fascinated reasonably more FDI inflows than the other provinces in this group.

In final analysis, FDI inflows in the 1990s have diffused from the originally concentrated southern coastal region towards the south-eastern and eastern coastal region in addition to central region. The three regional groups of the eastern, central and western regions experienced altered patterns in FDI inflows. FDI inflows have been increased steadily for the eastern region provinces with a surprisingly high growth rate, mainly from 1992 to 1998. But the other two regional groups, the inflows of FDI have been much less, particularly for the western area provinces. The result of which, the gap among the eastern section and the central and western sections in terms of the complete extent of yearly FDI inflows has essentially broadened since 1992. Examiner has shown that the provinces with larger GDP, high per capita income, higher intensity of accumulated FDI stock, more rigorous transport infrastructure and top level of telecommunications have paying attention fairly more FDI inflows, whereas upper labour costs have truly deterred FDI inflows. The prospect of central and western sections in provisions of FDI will be more promising as the improvement of infrastructure and additional honesty of the market attracts more FDI into these areas. Their relative returns lie in plentiful natural assets, additional opening up and development of the market. If the state-owned enterprises (SOEs), several of which are in the central and western regions, are open to overseas investors, a huge deal of FDI could flow into these section.

The market-oriented FDI aims to set up ventures to supply goods and services to the local market. This kind of FDI may be undertaken to exploit new markets. Apart from the traditional reason for circumventing tariff barriers, the market size, prospects for market growth, and the degree of development of host countries are very important location factors for market-oriented FDI. The general implication is that host countries with larger market size, faster economic growth and higher degree of economic development will provide more and better opportunities for these industries to exploit their ownership advantages and, therefore, will attract more market-oriented FDI. Even for export-oriented FDI, the market size of host countries is important because larger economies can provide larger economies of scale and spill-over effects. Over the past decades or more, the scale of China’s economic reconstruction has been expanding increasingly, with the purchasing power of the people strengthening rapidly and markets becoming increasingly brisk. Although China’s per capita GDP is still very low, its rapid economic growth and continuously increased purchasing power has made China attractive to market oriented FDI, such as in the fields of basic chemicals, drinks, household electrical appliances, automobiles, electronics, and pharmaceutical industries. The economic growth rate in China has slowed down from 1996 because of the modification of overall growth at the beginning of the 90s. In current years, the economic growth rate still remains at about 7 per cent. Taking such important factors into account, the level of economic development, the potential for technology development and the effect of reorganization, it is quite possible for China to keep economic growth at a rate of 6 to 7 per cent in the coming 10 years. If this is the case, China will stay on a fast growing huge market for overseas and domestic investors. However there is existence of a downside factor like the quick increase in the production capability and the slow growth of per capita income and consumption has resulted in periodical dispersion in China. The occurrence of supply beyond demand exists in the majority industries but in China it has been harsh in certain sectors or activities.

Natural, Sectoral and geographical distribution of FDI in China

Sectoral Distribution: so far the key percentage of FDI is drawn for the manufacturing field, which takes up approximately 60 percent of the total contracted FDI by 1998. Next follows real estate with the share of 24.4 %. The segment of the allocation industry together with transport, wholesale and retailing is 6.0 %. Construction comes after that with 3.1 %. The major industry such as agriculture, forestry and fishing takes 1.8 %. Soon, service trade, such as finances, wholesale, telecommunications and resale business, will take up a larger share on account of Chinese agreement to WTO and additional liberalisation. Additional deal liberalisation should also take place in conventional industries. Particularly, the extension of FDI in agriculture will rely on the level of opening up to the market flow of agricultural products and the industrialised process of production operations. human resource endowments – cost and productivity of labour One of the most important factors to attract FDI in China is the advantage in competitive production factors – labour force, land and natural resources. The degree of development of host countries is often considered one of the most important determinants of FDI flows because it is positively related to domestic entrepreneurship, education level, and local infrastructure. With the world’s largest population, China has rich resources of labour, with average salaries of workers remaining at a relatively low level. China has paid great attention to the education of its people such as nine-year universal compulsory education. Therefore, Chinese labourers are of relatively high quality and there are comparatively numerous technical personnel. Some fields, however, are in short supply – skilled managers, engineers and technicians. It is often argued that the labour cost in determining FDI flows should be the efficiency wage rate, which is adjusted in line with productivity rather than the “absolute wage”, especially if FDI is export-oriented. In terms of the efficiency wage rate, China still has good advantages as confirmed by empirical research. China is as well extremely rich in energy reserve. Chinese production of oil, its predominant fuel, is among the highest in the world (Saudi Arabia being the main producer) in spite of the fact that China imports it owing to high consumption. China is the largest producer of coal, roughly one third of the world’s total production and its coal industry has been troubled by a serious oversupply problem. As with coal, China’s electric power supply is also experiencing an oversupply problem. Other major natural resources such as land, iron and other minerals are economically available. With the globalisation of the world economy and the liberalisation of international trade and the giant strides in technological innovation, the advantage of a cheap labour force has become less important for foreign investors. China’s disadvantages in terms of technology gaps and lack of labour qualification in some areas will also take some time to improve.

Physical, financial and technological infrastructure

It can be supposed that the ease of use of physical infrastructure affects the decision of selecting the investment place. The additional highways, railways and interior transport waterways are adjusted in accordance with the size of host province, the more FDI inflows. An additional important variable is the level of telecommunication services. Advanced levels of telecommunications services will save time and reduce the costs of communication and information gathering, as a result facilitating business activities. Research confirms the supposition supported by other experimental studies that the provinces with more developed infrastructure are likely to be successful in attracting FDI. The same conclusion can be made for the technological infrastructure. In latest years, pressed by the market competition, the improvement speed of China’s industrial structure has been accelerated. Mainly, the progress of high-tech has been greatly speeded up. At present, China and its provinces have elaborated a variety of five-year plans and the development of high-tech industry has been a top main concern. The current level of the technology of China and its provinces functions in order to attract FDI and induce the technology transfer.

Openness to international trade and access to international markets

China has adopted the so-called “export promotion development strategy” which was confirmed to be a outstanding success in the Asian NIEs. Mutually with export promotion policy, China has implemented economic reforms and open door policies and made efforts to encourage trade by concluding several joint trade arrangements and adopted independent actions. There has been considerable progress in reducing tariff barriers in the 1990s, the average tariff rate on imports declined from 42.9 per cent in 1992 to 23.6 per cent in 1996 and to 17.0 percent in 1997. China has also formulated and implemented a series of preferential policies to encourage international trade. Duty exemptions for intermediate products used in the production of exports have been particularly important in boosting China’s foreign trade. However, there remain several barriers to free trade including administrative enforcement and non-tariff measures. The local content requirement and the export proportion requirement may inversely act to promote FDI. The import substitution policy may function to promote FDI in the short term but further competition, which can be created from the increase in import, may positively act to promote new additive investment in current investors for introducing high-technology production. Also, Chinese further acceptance of multilateral investment arrangement is necessary to promote FDI into China. For example, China still does not allow wholly foreign-owned companies to trade in many areas even though it has started to liberalise it. China’s admission into the WTO will be favourable to the settlement of the problems. In provisions of ease of access to international markets, China has also some merit. Export-oriented FDI aims to use particular and specific resources at a lower real cost in foreign countries and then to export the output produced to the home country or to third countries. Even though the most important location factors for export-oriented FDI are resource endowments, research found that China has a relatively attractive and strategic geographic position in that its territory is huge and offers access to other Asian countries and the Americas.

Development of the regulatory framework and economic policy coherence

Regulatory structure – China has endeavoured to launch a more transparent legal framework and business environment. It has been reorganization its legal system concerning FDI. China has amended a series of laws, regulations and provisions such as Equity Joint-venture Law and Contract Law just to name but a few. Also China has been relaxing some restraints and liberalising further on the area of restricted investment while it still keeps great emphasis on FDI in the encouraged fields and regions. Furthermore, since the mid-nineties, China has launched a programme to restructure and reduce the State-owned sector. It has made known that foreign participation would be welcome in the restructuring process, which will bring advanced managerial skill and enhance internal efficiency and international competitiveness. Given the need to reform Chinese SOEs, but bearing in mind the weaknesses of the domestic capital markets and the lack of managerial capacity, the Chinese policy to allow FDI in the areas of SOEs seems to be on the right track. It remains to be seen, though, how authentic participation of foreign investors will be allowed. Besides, as soaring unemployment seems inevitable in the process of the restructuring of SOEs, constructing a social security net is likely to be very onerous. Even after taking into account all recent Chinese measures, significant work still lies ahead to further improve the legal system for the market economy. The existing legal basis, legislation procedure and operating mechanism have not yet fully shifted to the needs of market economy. Various types of FDI recipients should come out in front. Privately owned enterprises have arriving inadequate share of FDI. Further efforts are expected to bring FDI inflows into these enterprises in line with the efforts of SOEs to further co-operate with potential foreign investors. Employment figures show that foreign direct investments in enterprises in villages and small towns have been considerable. Chinese efforts to comply with the international standards in its preparation for accession to the WTO will certainly expedite the reform policy.

Economic policy coherence – China is most likely to maintain its economic growth policy. In the year 2000, China is expected to record 7.3 to 8.5 per cent subsequent to 7.1 per cent growth rate in 1999. According to the Chinese government’s tenth Five-Year plan (2001-2005), Chinese economic growth will be kept above 7 per cent and China’s GDP will be around US$1 300 billion in 2003 and US$1 500 billion in 2005.