Foreign Direct Investment and China's Economic Development

Issues and Studies

Volumn 34, Issue 2, 1998, Pages 1-34

  Tso, Allen Y ^a  

^a UNIVERSITY OF WISCONSIN MILWAUKEE   (United States)

Author keywords

China's external economic relations; Economic development; Foreign direct investment; International trade; Newly industrialized economies

Indexed keywords

EID: 0346333443     PISSN: 10132511     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (23)

1. The body of literature is too large to be completely cited here. For examples, see Nicholas R. Lardy, China in the World Economy (Washington, D.C.: Institute for International Economics, 1994); Nicholas R. Lardy, "The Role of Foreign Trade and Investment in China's Economic Transition," The China Quarterly, no. 144 (December 1995): 1066-82; Shang-jin Wei, "Attracting Foreign Direct Investment: Has China Reached Its Potential?" China Economic Review 6, no. 2 (1995): 287-99; Satoshii Imai, "Comparison of Western, Overseas Chinese, and Japanese Ventures," JETRO China Newsletter, no. 119 (November- December 1995): 15-24; and Chung Chen, Lawrence Chang, and Yimin Zhang, "The Role of Foreign Direct Investment in China's Post-1978 Economic Development," World Development 23, no. 4 (1995): 691-703.
2. The body of literature is too large to be completely cited here. For examples, see Nicholas R. Lardy, China in the World Economy (Washington, D.C.: Institute for International Economics, 1994); Nicholas R. Lardy, "The Role of Foreign Trade and Investment in China's Economic Transition," The China Quarterly, no. 144 (December 1995): 1066-82; Shang-jin Wei, "Attracting Foreign Direct Investment: Has China Reached Its Potential?" China Economic Review 6, no. 2 (1995): 287-99; Satoshii Imai, "Comparison of Western, Overseas Chinese, and Japanese Ventures," JETRO China Newsletter, no. 119 (November- December 1995): 15-24; and Chung Chen, Lawrence Chang, and Yimin Zhang, "The Role of Foreign Direct Investment in China's Post-1978 Economic Development," World Development 23, no. 4 (1995): 691-703.
3. The body of literature is too large to be completely cited here. For examples, see Nicholas R. Lardy, China in the World Economy (Washington, D.C.: Institute for International Economics, 1994); Nicholas R. Lardy, "The Role of Foreign Trade and Investment in China's Economic Transition," The China Quarterly, no. 144 (December 1995): 1066-82; Shang-jin Wei, "Attracting Foreign Direct Investment: Has China Reached Its Potential?" China Economic Review 6, no. 2 (1995): 287-99; Satoshii Imai, "Comparison of Western, Overseas Chinese, and Japanese Ventures," JETRO China Newsletter, no. 119 (November- December 1995): 15-24; and Chung Chen, Lawrence Chang, and Yimin Zhang, "The Role of Foreign Direct Investment in China's Post-1978 Economic Development," World Development 23, no. 4 (1995): 691-703.
4. The body of literature is too large to be completely cited here. For examples, see Nicholas R. Lardy, China in the World Economy (Washington, D.C.: Institute for International Economics, 1994); Nicholas R. Lardy, "The Role of Foreign Trade and Investment in China's Economic Transition," The China Quarterly, no. 144 (December 1995): 1066-82; Shang-jin Wei, "Attracting Foreign Direct Investment: Has China Reached Its Potential?" China Economic Review 6, no. 2 (1995): 287-99; Satoshii Imai, "Comparison of Western, Overseas Chinese, and Japanese Ventures," JETRO China Newsletter, no. 119 (November-December 1995): 15-24; and Chung Chen, Lawrence Chang, and Yimin Zhang, "The Role of Foreign Direct Investment in China's Post-1978 Economic Development," World Development 23, no. 4 (1995): 691-703.
5. The body of literature is too large to be completely cited here. For examples, see Nicholas R. Lardy, China in the World Economy (Washington, D.C.: Institute for International Economics, 1994); Nicholas R. Lardy, "The Role of Foreign Trade and Investment in China's Economic Transition," The China Quarterly, no. 144 (December 1995): 1066-82; Shang-jin Wei, "Attracting Foreign Direct Investment: Has China Reached Its Potential?" China Economic Review 6, no. 2 (1995): 287-99; Satoshii Imai, "Comparison of Western, Overseas Chinese, and Japanese Ventures," JETRO China Newsletter, no. 119 (November- December 1995): 15-24; and Chung Chen, Lawrence Chang, and Yimin Zhang, "The Role of Foreign Direct Investment in China's Post-1978 Economic Development," World Development 23, no. 4 (1995): 691-703.
6. It is worth noting that due to Taiwan's official restrictions on direct investment in China, many Taiwan firms have chosen to first set up affiliates in Hong Kong and then invest indirectly in China through the Hong Kong affiliates. The above figures thus may still understate Taiwan's actual investment in China.
7. See Lu Ding and Zhu Gangti, "Singapore Foreign Direct Investment in China: Features and Implications," ASEAN Economic Bulletin 12, no. 1 (1995): 53-63.
8. For a formal analysis of the causes of NIE investment in China, see Allen Y. Tso, "On the Trade-Investment Relationships Across the Taiwan Strait," Issues & Studies 32, no. 8 (August 1996): 54-72.
9. According to Linder's theory of overlapping market segments, the relatively small difference in per capita income between China and NIEs implies that they share a relatively similar market structure compared to that between China and a developed country. If we assume a spectrum of products within a Chamberlinian product group, with the price of each differentiated product positively associated with each product's quality, then compared to the products manufactured by Chinese domestic enterprises, the differentiated products made by NIE firms will generally command better quality, and thus have upper-end prices in Chinese consumer markets (e.g., better instant noodles, quality clothing). Although the quality of products made by firms from developed countries may be better than that of NIE firms, the Chinese demand for the former may be less than that for the latter because of a limited overlap of the Chinese demand structure with that in developed countries. In trade, this would imply a greater trade volume between NIEs and China, as there exists a greater demand for the products made by NIEs over those of developed countries. As a substitute for trade, NIE firms may take advantage of this opportunity to invest in China and to maximize their sales and profits. Other things being equal, this would give NIE firms a greater incentive to invest in China than do the multinationals of developed countries.
10. See Kao Charng and Wu Shih-ying, Taishang yu waishang zai dalu touzi jingyan de diaocha yanjiu: Yi zhizaoye weili (dier nian) (A survey of investment experience of Taiwanese and foreign enterprises in mainland China: The example of manufacturing industries [2nd year]) (Taipei: Chung-Hua Institution for Economic Research, 1995).
11. In terms of contractual values, these forms of investment took the shares of 48, 25, 26, and 1 percent, respectively.
12. These features can be consistently explained in terms of John H. Dunning's internalization theory. See John H. Dunning, Economic Analysis and the Multinational Enterprise (London: George Allen & Unwin, 1981).
13. It is worth noting that NIEs have recently shown a strong interest in investing in infrastructure projects such as highways, power stations, container terminal buildings, urban renovation, and industrial park development.
14. The Chinese investment regime may have caused the bias. Throughout the 1980s, China adopted a policy of encouraging foreign investment to export their products and only allowed sales of high-tech products or products in short supply in the domestic market in order to replace imports.
15. See Ick Soo Kim, "Problems and Modalities of Sino-Korean Economic Cooperation," Korean Journal of International Studies 25, no. 3 (1994): 321-42.
16. In a multiple regression analysis, Chung Chen, Lawrence Chang, and Yimin Zhang show that 1 percent increase in actual FDI in 1995 could raise the Chinese GNP in 1996 by roughly 0.635 percent. See Chen, Chang, and Zhang, "The Role of Foreign Direct Investment" (cited in note 1 above). Based on separate survey data, Lin Chu-chia shows that every US$1 of foreign investment in China contributed to US$3.2-3.6 dollars increase in output. See Lin Chu-chia, Shenzhen diqu Taizi qiye yingyun jixiao diaocha yanjiu (A survey of business performance of Taiwanese firms in Shenzhen) (Taipei: 1993).
17. In a multiple regression analysis, Chung Chen, Lawrence Chang, and Yimin Zhang show that 1 percent increase in actual FDI in 1995 could raise the Chinese GNP in 1996 by roughly 0.635 percent. See Chen, Chang, and Zhang, "The Role of Foreign Direct Investment" (cited in note 1 above). Based on separate survey data, Lin Chu-chia shows that every US$1 of foreign investment in China contributed to US$3.2-3.6 dollars increase in output. See Lin Chu-chia, Shenzhen diqu Taizi qiye yingyun jixiao diaocha yanjiu (A survey of business performance of Taiwanese firms in Shenzhen) (Taipei: 1993).
18. Harry Johnson, "The Possibility of Income Losses from Increased Efficiency or Factor Accumulation in the Presence of Tariffs," Economic Journal 77 (1967): 151-54.
19. Xu Yinfeng, "Trade Liberalization in China: A CGE Model with Lewis Rural Surplus," China Economic Review 5, no. 2 (1994): 205-19.
20. W. Arthur Lewis, "Economic Development with Unlimited Supply of Labour," Manchester School of Economics and Social Studies 22 (1954): 139-91.
21. See Lin, Shenzhen diqu Taizi qiye yingyun jixiao diaocha yanjiu.
22. According to a recent report, foreign-invested enterprises have surpassed SOEs in trade volume since early 1996.
23. Chen Li-ying et al., Dalu quyu jingji gongye fazhan de yanjiu (A study of regional industrial development in mainland China) (Taipei: Chung-Hua Institution for Economic Research, 1995).