Main determinants of FDI in China
Theory classifies FDI into two types: market-oriented and export-oriented FDI.
Size and growth of the Chinese economy and prospects
Apart from the traditional reason for circumventing tariff barriers, the market size, prospects for market growth, and the degree of development of host countries are very important location factors for market-oriented FDI.
human resource endowments – cost and productivity of labour
One of the most important factors to attract FDI in China is the advantage in competitive production
factors – labour force, land and natural resources. The degree of development of host countries is often
considered one of the most important determinants of FDI flows because it is positively related to domestic entrepreneurship, education level, and local infrastructure.
With the world's largest population, China has rich resources of labour, with average salaries of workers
remaining at a relatively low level.
Physical, financial and technological infrastructure
It can be presumed that the availability of physical infrastructure affects the decision of selecting the
investment place: The more highways, railways and interior transport waterways are adjusted according to
the size of host province, the more FDI inflows. Another important variable is the level of
telecommunication services. Higher levels of telecommunications services will save time and reduce the costs of communication and information gathering, thus facilitating business activities. Research confirmsthe assumption supported by other empirical studies that the provinces with more developed infrastructureare likely to succeed in attracting FDI.
Openness to international trade and access to international markets
China has adopted the so-called “export promotion development strategy” which was proven to be a
remarkable success in the Asian NIEs. Together with export promotion policy, China has implemented
economic reforms and open door policies and made efforts to promote trade by concluding several bilateral trade arrangements and adopted unilateral actions. There has been substantial progress in reducing tariff barriers in the 1990s
However, there remain several barriers to free trade including administrative enforcement and non-tariff
measures.
Development of the regulatory framework and economic policy coherence
Regulatory framework – China has endeavoured to introduce a more transparent legal framework and
business environment. It has been streamlining its legal system concerning FDI. China has amended a
series of laws, regulations and provisions such as Equity Joint-venture Law and Contract Law just to name
but a few. Also China has been relaxing some restraints and liberalising further on the area of restricted
investment while it still keeps great emphasis on FDI in the encouraged fields and regions.
Economic policy coherence – China is most likely to maintain its economic growth policy.
Investment protection and promotion
Investment protection – There have been no cases of expropriation of foreign investment since China
opened up to the outside world in 1979.
Investment promotion –The Special Economic Zones of Shenzhen, Shantou, Zhuhai, Xiamen and Hainan, 14 coastal cities, dozens
of development zones and designated inland cities all promote investment with unique packages of tax
incentives.
The incentives available include significant reductions in national and local income taxes, land fees, import and export duties, and priority treatment in obtaining basic infrastructure services.
Tax incentives,
Conclusions and preliminary findings
The analysis of the impact of FDI on China’s external trade structure reveals the following findings:
China’s policy aimed at promoting export-oriented FDI has met with remarkable success. It has led to thebuilding of an internationalised manufacturing sector, highly competitive in world markets. The resilience of this export-oriented and import-dependant sector during the Asian crisis was remarkable.
FDI firms can be expected to continue to strengthen China’s comparative advantages by increasing its
specialisation in the exports of labour intensive products and technology intensive products.
The positive effect of China’s opening up strategy was not so evident, however, for domestic firms, which
recorded a relatively modest export performance. The internationalised sector also developed few
backward and forward linkages with the rest of the economy. A reason why domestic firm exports lagged
behind can also be found in their limited access to foreign equipment and technology.
China’s entry into the WTO will have far-reaching consequences. It will put an end to the fragmentation of China’s trade regime and allow a more equal access to foreign resources. Chinese firms should take
advantage of lower import tariffs to proceed with their technical modernisation and enhance their
competitiveness on domestic and world markets. After accession China’s trade is likely to become less
dependant on foreign firms as liberalisation will give more room to imports supplying the domestic market.
As pointed out by several studies, joining the WTO will lead to an accelerated transfer of production factors from agriculture to industry and, within industry, from capital intensive to labour intensive sectors. Trade liberalisation will strengthen China's comparative advantage in labour intensive sectors. It is likely to deepen China’sintegration in the international segmentation of production process, as this strategy makes it possible tocapitalise on its specialisation in labour intensive stages of production while diversifying its export capacities towards more technologically advanced products