China’s Economic Miracle

China’s Economic Miracle

Does FDI Matter?

Sumei Tang, Eliyathamby A. Selvanathan and Saroja Selvanathan

This insightful book analyses the impact of Foreign Direct Investment (FDI) in China as well as making valuable contributions to the theory of FDI more broadly. The authors provide empirical analysis of key factors including the location-specific determinants of FDI; the impact of FDI on domestic investment, income distribution, consumption and tourism; the relationship between FDI inflows and income inequality; causality between FDI, domestic investment and economic growth; and causality between FDI and tourism. The study concludes that FDI plays a crucial and positive role in the economic development of China. Rather than crowding out domestic investment, FDI is found to stimulate economic growth by complementing it.

Chapter 1: Introduction

Sumei Tang, Eliyathamby A. Selvanathan and Saroja Selvanathan

Subjects: asian studies, asian business, asian economics, business and management, asia business, international business, development studies, development economics, economics and finance, asian economics, development economics

Extract

1.1 BACKGROUND AND MOTIVATION Globalization has become a significant economic phenomenon since the late nineteenth century and FDI has been an important driving force of globalization. FDI has become an important competitive strategy for enterprises to invest all over the world to access markets, technology, resources and talent. On the other hand, host governments consider FDI as crucial to the development of their economies, exports, employment opportunities, and competitiveness. China, in this increasingly competitive world economy, has absorbed enormous amounts of FDI inflows since the economic reforms introduced in 1978. Table 1.1 presents the FDI inflows to China, total FDI inflows to Asia, and the share of China’s FDI in total Asian FDI inflows, total FDI inflows to developing countries and the share of China’s FDI in total FDI inflows to developing countries in selected years. Figure 1.1 shows China’s FDI inflows during the period 1978 to 2005.1 As can be seen, China’s FDI inflows were low during the period 1978 to 1991 but since 1992 China’s FDI inflows have surged dramatically at a growth rate of 150 per cent in 1993. This placed China as the largest FDI host country in the developing world in 1993 and since then, in 2002, FDI inflows to China surpassed the United States making China the largest FDI recipient country in the world. Figures 1.2 and 1.3 show the share of China’s FDI inflows in the total FDI inflows to Asian and to developing countries in 2002. As can be seen, China’s FDI...