Impact of FDI in Economic Growth of China

In 1978, China started an economic reform. The promotion of foreign direct investment (FDI) inflow is an important part of the economic reform process. After more than 30 years of economic reform, China has become one of the most important destinations for FDI.

In recent years, foreign-invested firms have become a very important part of the Chinese economy. Foreign capital has played a largely positive role in China’s economic development during the reform.

· It can generate more benefits than just helps solve the capital shortage problem.

· FDI may provide better access to technologies for the local economy.

· It can also lead to indirect productivity gains through spillovers. For instance, with the entry of multinational companies, competition increases in the local market which will force existing inefficient firms to invest more in physical or human capital. Usually MNCs provide training for labor and management which makes them become available to the economy in general.
· FDI inflow benefits China’s economical growth by inducing higher.

Nation has achieved economic growth at an impressive speed. External trade is now becoming very important element of nation’s economy which is the direct impact of economic reform. Expansion of its trade with the rest of the world is the direct outcome of reform. Gradual reforms of over three decades have transformed China’s economy from a centrally planned economy dominated by the state sector to a market-oriented economy consisted of firms with various ownership form. Government has encouraged technology transfer through various forms of foreign investment in the economy.
Positive impacts

· FDI leads to a fast increase in import and export trade in China. From 1985 to 2000, the market share of China in the international trade has increased from 1.6 % to 6.1%.

· FDI has created large number of job opportunities. It increased the employment rate in China. Creation of employment opportunities both directly and indirectly has been one of the most prominent impacts of FDI on the Chinese economy.

· The productive value produced by companies supported by FDI has occupied a higher proportion in the gross value of industrial output.

· When foreign-invested companies want to choose local companies as their distributors in order to broaden market channel or when their products are purchased by local companies as semi-finished products, they will build a backward industrial chain relation

· The coming of FDI has brought about severe market competition which forces domestic companies to perform technological reform to improve productive efficiency. As a result the investment of domestic companies has been increasing.

· The research and development activities performed by the foreign-invested companies have enhanced the technological spillover effects. Domestic companies may have increased the investments in research and development activities in order to gain competitive advantages.

· Urbanization has experienced an accelerated growth pace. Between 1978 and 2000, nation’s urban population had increased from 172 to 458 million. The corresponding urban population rose from 18% to 36%.
Negative impacts

· The rapid expansion of FDI has increased the risks of international balance of payments. The capital surplus brought about by FDI could make up the deficit in a short term.

· The long-term favorable treatments to foreign capital will lead to a spillover effect on the domestic capital. It may cause the scarcity of domestic investment demand. And that will make it hard to activate the civilian investment.

· The loose supervision has caused the lost of state-owned asset and has threatened the safety of China’s economy.

· FDI has modified China’s industrial structure. State-owned enterprises (SOEs) lost their dominance in industry sector. Their share fell from 65 % in 1985 to 25 % in 1997. Major gains in industrial structure were registered by private firms. Collectively owned enterprises became the most important category of ownership in industry.

· Regional disparities have increased as the FDI has been heavily concentrated in the coastal provinces. At the end of 1998, FDI firms’ urban employment was heavily concentrated (85.76%) in the eastern region provinces, more particularly in Guangdong, Fujian, Jiangsu, Shandong, Liaoning and Zhejiang, and the municipalities of Shanghai, Beijing and Tianjin. In contrast, in the central and the western regions it was only 11.15%, and 3.09% respectively. It widened the income gap between the eastern and the western regions of China.

· Multinational companies have started to pay higher salaries for their employees. It put pressure on domestic firms’ to pay high for employees to retain their staff which exerts an extra burden on their revenue.