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Chunlai Chen

Over the last three and a half decades, China has achieved remarkable economic growth with an annual average real GDP growth rate of around 10 per cent. Chapter 2 investigates empirically how FDI has contributed to China’s regional economic growth and how the local economic and technological conditions of host provinces influence the extent to which FDI contributes to local economic growth. Through the application of a provincial-level panel dataset containing China’s 30 provinces over the period 1987–2014 and regression techniques, the study finds that FDI has contributed to China’s economic growth directly through capital augmentation and technological progress and indirectly through knowledge spillovers on the local economy. The study also finds that the contribution of FDI to economic growth is influenced by local economic and technological conditions. FDI has stronger impacts on economic growth through capital augmentation and technological progress in the more economically developed coastal provinces than in the less-developed inland provinces. While FDI has a positive and significant impact on economic growth through knowledge spillovers in the developed coastal provinces, positive knowledge spillovers of FDI on economic growth are absent in the less-developed inland provinces. This finding provides empirical evidence to suggest that local economic and technological conditions, especially local absorptive capability, do matter in influencing the diffusion of knowledge spillovers from FDI to the local economy.

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References

A Critical Assessment

Chunlai Chen

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Preface

A Critical Assessment

Chunlai Chen

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Introduction

A Critical Assessment

Chunlai Chen

Since the implementation of the market-oriented economic reform and open policies in late 1978, China has attracted massive foreign direct investment (FDI) inflows. Chapter 1 starts with an examination of the characteristics of FDI in China. It finds that FDI in China is characterized by fast growth and a huge amount of inflows; uneven regional distribution with heavy concentration in the coastal region; overwhelming concentration in the manufacturing and services sectors; and heavy engagement in the processing trade. The chapter then raises the main issues to be explored in this study: the impacts of FDI on China’s regional economic growth, urban–rural income inequality and urbanization development. To establish a theoretical framework for the empirical analysis, the chapter presents a compelling and thorough analysis of the leading theoretical explanations of FDI. Among the many theories, Dunning’s OLI framework has been the most influential and comprehensive explanation of FDI. As a result, it is used as the fundamental theoretical framework for this study. According to Dunning’s OLI framework, because of its ownership advantage and the possession of firm-specific intangible assets, FDI is expected to produce a series of impacts on a host country’s economy through capital formation, employment creation, and more importantly through knowledge spillovers to the host country’s domestic economy. Therefore, based on the theoretical framework derived from Dunning’s OLI paradigm, the chapter discusses the main implications of the existing theory for this study. Finally, the chapter outlines the structure of the study.

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Chunlai Chen

The heavy concentration of FDI in China’s coastal provinces has attracted hundreds of millions of rural migrants from inland provinces to work in coastal provinces. Every year these workers send massive remittances back home to support their families and hence boost their home town economies. This type of resource movement associated with FDI may play an important role in income distribution in China’s inland provinces. Chapter 5 aims to investigate the interregional impacts of FDI in the coastal region on urban–rural income inequality in inland provinces of China. Through the application of a provincial-level panel dataset containing China’s 19 inland provinces over the period 1987–2014 and the fixed-effects and instrumental variable regression technique, the study finds that FDI in the coastal region contributes to the increase in urban–rural income inequality in inland provinces. The explanation is that FDI in the coastal region generates negative spillover effects on the economic growth of inland provinces. This is because FDI in the coastal region is heavily engaged in the processing trade, has fewer industrial linkages and even competes with firms in inland provinces in both factor and product markets. In addition, the interregional migration and income remittance effect associated with FDI in the coastal region tends to increase urban–rural income inequality of inland provinces due to the average remittance sent by rural migrant workers being less than the average rural household per capita net income in inland provinces.

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Chunlai Chen

Foreign direct investment in China is heavily concentrated in the coastal region. Do inland provinces benefit from FDI in the coastal region? Chapter 3 investigates empirically the interregional impacts of FDI in the coastal region on the economic growth of inland provinces. By using a provincial-level panel dataset containing China’s 19 inland provinces over the period 1987–2014 and employing the fixed-effects and instrumental variable regression techniques, the study finds that, on average, FDI in the coastal region has had a negative impact on economic growth in inland provinces. By further dividing FDI in the coastal region into FDI in the coastal provinces engaging in medium-level processing trade and FDI in the coastal provinces engaging in high-level processing trade, the study finds that FDI in the coastal provinces engaged in medium-level processing trade has no significant interregional impact on the economic growth of inland provinces. However, FDI in the coastal provinces engaged in high-level processing trade still has a negative interregional impact on the economic growth of inland provinces. The explanation for this could be that processing trade has no industrial linkages with and cannot generate backward and forward knowledge spillovers to firms in inland provinces. Therefore, this study provides further evidence of the importance of industrial linkages in enhancing knowledge spillovers from FDI to the local economy.

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Chunlai Chen

Foreign direct investment in China has created a large amount of employment opportunities for rural surplus labor and the heavy concentration of FDI in China’s coastal region has attracted hundreds of millions of rural migrants from the inland region to work in the coastal region. This type of rural–urban and cross-region population migration associated with FDI may have impacts on China’s urbanization development, especially on the urbanization development in the inland region. Chapter 6 uses a city-level panel dataset covering China’s 262 cities for the period 2004–13 and employs the dynamic panel system Generalized Method of Moments (GMM) model with the instrumental variables regression techniques to investigate empirically both the impacts of FDI on urbanization development in China and the interregional impacts of FDI, especially FDI in the coastal region, on the urbanization development of the inland region. The study finds that FDI has played a significantly positive role in the urbanization development of a host city. However, the study also finds that FDI in other inland cities and FDI in coastal cities have different interregional impacts on the urbanization development of an inland city. FDI in other inland cities could contribute to increasing the urbanization development of an inland city as FDI in other inland cities can create positive interregional knowledge spillovers due to its low level of engagement in processing trade and extensive industrial linkages with firms in inland cities. However, FDI in coastal cities impedes the urbanization development of an inland city because FDI in coastal cities has negative interregional spillover effects resulting from its high level of engagement in processing trade and lack of industrial linkages with firms in inland cities.

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Chunlai Chen

Since the economic reforms implemented in late 1978, China has achieved remarkable results in increasing per capita income and improving the living standards of the Chinese people, which have been attributed to the rapid economic growth. However, with this fast economic growth, income inequality, especially urban–rural income inequality, in China has actually worsened. While FDI has contributed to China’s economic growth, has FDI also contributed to the increase of income inequality in China? Chapter 4 investigates empirically whether FDI has improved or worsened urban–rural income inequality in China. By using a provincial-level panel dataset containing China’s 30 provinces over the period 1987–2014 and employing the fixed-effects and instrumental variable regression techniques, the study finds that the effect of FDI on urban–rural income inequality is non-linear. At first, FDI increases urban–rural income inequality. And after reaching a critical level, FDI starts to reduce urban–rural income inequality through employment creation, knowledge spillovers and contribution to economic growth. Overall FDI will contribute to reducing urban–rural income inequality in China as FDI inflows continue to rise. However, the study also finds that FDI has indirectly contributed to increasing urban–rural income inequality in China through its significant role in international trade. In addition, the study finds that there exists a Kuznets inverted-U curve relationship between urban–rural income inequality and economic development, suggesting that urban–rural income inequality will gradually decline in China as China’s economy continues to grow and per capita income keeps rising.

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Foreword

A Critical Assessment

Chunlai Chen

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Chunlai Chen

Foreign Direct Investment and the Chinese Economy provides a comprehensive overview of the impact of foreign direct investment, with extensive empirical evidence, on the Chinese economy over the last three and a half decades.