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CHINA
Over the past few years the world has experienced a tremendous growth in Foreign
Direct Investment (FDI), that has even exceeded the growth of both world output and
world trade( Ali &Guo 2005). China is by far one of the world‟s largest recipients of FDI
and in 2004 surpassed the USA as host destination. FDI inflows to China rose from
nothing at the beginning of the reforms in the 1970s to between US$40-45 Billion per
year in the second half of the 1990s (Tseng and Zebregs 2002). FDI started increasing
rapidly from 1991 especially after the „southern journey‟ supporting rapid growth and
reforms for opening China up to the rest of the world made by the late Deng Xiapong in
1992. This tour brought about an era of renewed confidence and entrepreneurship.
China experienced a slight reduction in FDI inflow during the Asian Crisis but was back
at an increase soon after; due to its participation in the WTO. The main sources of FDI
inflow in China were officially Hong Kong (SAR) and Taiwan Province of China. The
importance of these countries as the main sources of FDI diminished in the 90s as
multinational companies from Europe, Japan and the United States entered China, but
even so Hong Kong and Taiwan Province of China still account for almost half of the
FDI in China. Foreign Investors in China fall under two main categories; those using its
cheap labour for an export platform and those who are there to target the Chinese
market itself (Henly, Kirkpatrick and Wilde 1999). Small scale investment firms, often
originating from Hong Kong fall into the first category while transnational and
multinational companies from Europe, Japan and the United States fall into the second
category. Looking at sectored distribution of FDI the largest amount of FDI is generated
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from manufacturing, this accounted for almost 60 percent of total FDI in the year 2000.
(which consists of transport, wholesale, and retail) at 6 percent. (Tseng and Zebregs
(examples are textiles and clothing, food processing and furniture), technology intensive
chemical machinery). These propose that to majority of the companies, the motivation
to invest in China is to enable them take advantage of the low labour costs that it has to
offer.
Geographical distribution of FDI in China shows a great amount of inequality among the
regions. The eastern region accounts for the majority of the FDI flow into China. The
inequality of distribution of FDI originates from the FDI policies implemented by the
Chinese government during the early reform times. Much of the early reforms where
experiments on selected regions and industries; this was for the purpose of allowing the
authorities to assess the results of allowing FDI before permitting it to other regions and
sectors. The Open door policy started with the creation of the Special Economic Zones
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(SEZs) in the southern provinces of Guangdong and Fujian at the start of the reforms in
the late 1970s, which were later followed by the opening of another SEZ in Hainan and
concentration of FDI in the eastern part of China. Looking at the main vehicles of FDI in
China, equity joint venture companies (EJV), Cooperative Joint Companies (CJV), and
Wholly foreign owned Ventures (WFO) have been the main ways of obtaining FDI in
China. At the beginning of the reform period China allowed only EJVs as a form of
entry; this was because authorities believed that this form of entry would better benefit
them in terms of gaining advanced technology. Equity joined ventures and Wholly
Foreign Owned Ventures were permitted at a later stage but looking a later data WFO
have become a more popular form of entry because the reassurance provided by
having a Chinese Joint venture partner is viewed as less necessary than it was in the
host countries have illustrated that that characteristics like economic development ( this
includes market size, labour costs etc.) and FDI policy factors (these include tax
incentives, free tax zones etc.) have direct influence on the destination of flows of
capital across national borders. These factors that are part of the location advantage
Below we look at the different determinants of FDI that have resulted in China being an
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Market Size
Market size has been an important determinant of FDI worldwide, in the case of China
this has been important for countries like Europe and the United States than for FDI
from Hong Kong and Taiwan Province of China; this is because the former are
investors. Gross National Product (GNP) is used to reflect the economic development of
a country. It shows the potential demand of a country and therefore gives a good
countries market size. FDI has been attracted to China due to the enormous market
potential that China has to offer. The table below shows the GNP of China between the
years of 1989 and 1999; showing the gradual increase in GNP therefore the increase in
market size which has resulted in China being an attractive Investment area.
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Supply of Cheap Labour
Foreign Investors seek to take advantage of the host countries‟ cheaper factor inputs
compared to their home countries; the cost of labour is often considered as one of the
most important factors. In other words, foreign investors display sensitivity to inter-
country variations in labour costs when making their location decision(Broadman and
Sun 1997).Low wage costs have played a big role in attracting FDI towards China and
in the distribution of FDI flow across it provinces. Analysts have suggested that these
low wage costs have been an important factor in attracting the export-orientated FDI
from Hong Kong and Taiwan Province of China due to the rising wage costs in their
countries and the economies in the region. This has resulted in China‟s emergence as
one the important global competitors in the labour intensive manufacturing. Another
factor that FDI investors look at is the quality of labour, over the years China has been
less attractive to FDI because of this factor but due to the governments‟ continuous
efforts to improve the quality of education it has been improving (for example they are in
We can view the progress of quality of education by looking at literacy rates over the
years. As we can identify in the charts below over the years the literacy rates of both
youth and adults have increased making China not only favourable because of its
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Infrastructure
provinces in China with more developed infrastructure receive more FDI (Tseng and
Zebregs 2002). FDI in China is concentrated on the eastern coastal areas, these areas
have superior infrastructure and transport links to external markets. In these areas
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which are mainly Open Economic Zones (OEZs) the government delegated investment
decisions to the local government which allowed them to develop the infrastructure and
has therefore attracted investors. Another important factor which attracts investors is the
geographical location of a place in the case of China the provinces located on the
coastal areas attract FDI; not only because of its accessibility to ports and other markets
but also because of the government FDI policy regimes in these areas. These
improvements can be viewed in the following table sourced from the World Bank (IMF
Scale Effects
Studies have analysed looking at the flow of FDI that not only in China but with FDI
everywhere, that once a country or a province has attracted a critical mass of FDI, it will
positive signal (Cheng and Kwan 2000). Economies of Scale also make it more efficient
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for foreign multinationals to locate in the same area because it allows them to share
Guagdong and Fujian, which are close to Hong Kong and Taiwan Province of China,
have been the largest attracters of Foreign Investors. With investors already present in
the area it makes the area an attractive location to invest because most companies are
followers.
environment have played a major role in attracting FDI into China. The Chinese
government starting from the reforms era after having considered attracting FDI an
important goal to achieve as it would introduce new technologies know-how and capital
and also help in developing the export sector which would increase income. The
government was afraid of the risks posed with opening up their economy but overtime
clarified the legal environment for FDI by relaxing government controls, and improving
and providing practical assistance, as well as political and legal assurances (Tseng and
Zebregs 2002). This started out with experiments limited to a few locations and sectors
at the beginning of the reforms and later on resulted in more regions and economic
sectors being opened up by the 90s. These actions taken by the government of China
to make China a more open economy has made it an attractive location for investment
by many investors.
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The preferential policies set up to attract FDI by the government have been tax
concessions and special privileges for foreign investors, and the establishment of OEZs.
The tax incentives for Foreign Funded Enterprises (FFEs) are mostly in the form of
reduced enterprise income tax rates and tax holidays. These incentives are available to
all FFEs and domestic enterprises in the OEZs and to export orientated and advanced
technology FFEs outside the OEZs. In addition to these incentives firms in the OEZs
enjoy high level of autonomy in managing operations, this is because the experience
very little control on goods movements, and are allowed to export almost freely. These
firms also benefit from more flexible labour relations and more liberal land use. There
are also additional benefits for export orientated and advantage-technology FFEs, these
include tax exemption on profit remittance, additional tax benefits for re-invested profits,
and larger reduction in land use fees. Governments have the ability to influence the way
investors view their economy, China has been successful in fulfilling the requirements in
making China an attractive investment spot. (View the appendix for detailed
To sum it all up over the years from the beginning of the reform era China has been
successfully establishing itself as a hot spot in Asia to invest. It has gained its position
as not only one of the largest FDI recipient in the world but also the largest recipient of
FDI in Asia. Factors that have contributed to making China the most attractive place in
Asia to invest includes the large market that China has to offer, Cheap Labour for
reduction of total production costs, well developed infrastructure that has a range, scale
effect resulting from investors‟ perception and reduced barriers to FDI and preferential
policies. Even with the risks that government‟s fear FDI can bring, the government of
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China has been able to successfully open up China to the rest of the world and have in
return gained a lot. FDI inflows have been more than sufficient to finance periodic
current account deficit on the balance of payment, it has made significant contribution to
investment and industrial output, and increased employment rates among many other
benefits.
APPENDICES
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References
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Henly.J, Kirkpatrick.C, Wilde.G, 1999, Foreign Direct Investments in China: Recent
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