Foreign Direct Investment in China

From an isolated state to one of the most FDI-friendly countries in the world,1 since 1993 China has become the largest foreign direct investment (FDD recipient in the developing world, and globally, the second largest (after the United States). Since 2004, annual FDI flows into China have been over US $60 billion, and by mid-2006, the accumulated FDI in China was US $651 billion.2 The role of FDI in the Chinese economy has become increasingly important. In 2004, FDI inflows constituted seven percent of gross fixed capital formation; 21 percent of China's tax revenue came from the foreign-invested enterprises (FIEs), 28 percent of industrial output was produced by FIEs; and more than half of China's exports (57 percent) were created by FIEs.

This paper considers some important issues of FDI in China during the period 1979-2005 in the context of conflicting claims in academic and policy circles, with the objective of addressing the following questions: Why was China successful in attracting FDI? Why did China succeed in utilizing FDI? What strategy and policy did China use? What can be anticipated? The main conclusions of the article can be summarized as follows:

* China's attraction for foreign investors is mostly due to its huge market and cheap labour. Overseas Chinese (especially investors from Hong Kong and Taiwan) make a key contribution to the growth and volume of FDI inflows. China's additional advantages over other countries include a liberalized FDI regime, improving infrastructure, and cheap resources (land and raw materials).

* China's bargaining power over mu...

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