Title: China and Foreign Direct Investment: Market-Oriented Policies and FDI Inflows
Abstract: China's rapid rise to economic prominence was made possible by its ability to attract foreign private investment and technology. This study illuminates the evolution and vital impact of China's foreign direct investment policy regime. China's market-oriented reforms reduced barriers to foreign investment and various measures of preferential treatment and liberalization were key drivers of FDI inflows. A profile of foreign direct investment China is followed by a discussion of key laws and government legislation designed to attract foreign investment into China. A major finding of this study is that public policies the form of market-oriented reforms, policy credibility and institutions to implement liberalization policies matter a great deal. 'Special Economic Zones' played a vital role China's drive to create a receptive environment for foreign investors. Key Words: China; Foreign private investment; Foreign direct investment; Market-oriented reforms; Preferential trade measures; Special economic zones. In 1978-9, Deng Xiaoping initiated market-oriented reforms and 'opening up' policies. At that time, foreign direct investment (FDI) flows to China were practically nil. Two decades later, China became the largest recipient of foreign direct investment the developing world. In 2006 it surpassed the United States as the single largest beneficiary of FDI inflows the world. Obviously, certain location advantages (attributes) of China serve as key catalysts to 'pull in a high volume of FDI. These include: (1) Foreign investors have been attracted to China because of its enormous and rapidly growing market size. (2) An abundant supply of skilled and semiskilled labor and low wage costs has also played a significant role attracting foreign direct investment. (3) China is blessed with an increasingly modern infrastructure. There is a direct positive correlation between developed infrastructure (transport links to external markets, communication and electric power infrastructure) and FDI inflows. One reason the coastal area of eastern China has attracted the largest amount of FDI is the superior infrastructure of coastal cities. (4) These special attributes of China have been buttressed by a unique location advantage: the role of the Chinese Diaspora as a significant source of foreign capital and expertise.1 These Chinese advantages have already been covered the literature. It suffices to say that nearly all aspects of China's attractiveness as a final destination for FDI as just listed are influenced by the public policies of the Chinese government. Market-oriented reforms, reduced barriers to foreign investment and other measures of preferential treatment have played a vital role enabling foreign firms to leverage various pre-existing location advantages. Because of this, the central focus of this essay is to illuminate the vital impact of China's foreign direct investment policy regime, with its preferential public policies to attract FDI, as the key driver of FDI inflows. This focus is especially warranted when one considers that India has many of the same location advantages and several others - notably a democratic system, an Englishspeaking population and a strong tradition of due process - and yet has only attracted a fraction of the annual volume of FDI flowing into China. This study begins with a short profile of FDI China. We will briefly highlight the size, source, composition and geographical distribution of foreign direct investment. Next, we will explore the key elements of the Chinese government's foreign direct investment regime. The study will shed light on the impact of legislation China designed to attract foreign investment. Among other things, we will examine the political economy of 'Special Economic Zones' China's drive to create a receptive environment for foreign investors. It is not our goal to examine the impact of FDI on China's economy, its growth prospects or global competitiveness. …
Publication Year: 2009
Publication Date: 2009-10-01
Language: en
Type: article
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Cited By Count: 2
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