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Discuss about the impacts of FDI on China's economy There are a lot of impacts of...

Discuss about the impacts of FDI on China's economy

There are a lot of impacts of FDI on China's economy

Plz write some important impacts of FDI. What is more, plz give me some datas of the impacts of FDI on China's economy

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Since late 1978, with the implementation of market-oriented economicreform, inward foreign direct investment (FDI) has been encouraged in China. As a consequence, foreign reforrms have been attracted by the huge domestic market and pool of relatively well-educated, low-cost labour, which has made China one of the most attractive destinations for FDI in the world. By the end of 2013, China had attracted a total of US$1.4 trillion in FDI inows, making it the largest FDI recipient in the developing world.

What are the impacts of FDI on China’s economic growth? It is expected that FDI brings into a host country a package of capital and frm-specifc intangible assets and, as a result, it plays a positive role in the economic development process of a host country (Caves 1996; Dunning 1993; Markusen and Venables 1999; UNCTAD 1999, 2004). In the past three decades of remarkable economic growth, FDI has contributed greatly to China’s economy in terms of capital formation, employment creation and export expansion (Chen 2011). The main interest in this chapter is to investigate and identify empirically how FDI has contributed to China’s regional economic growth. Using a panel dataset containing China’s 30 provinces1 over the period 1987– 2010, this chapter estimates an augmented growth model in which direct effects (for example, raising output and productivity through capital augmentation and technological progress) and indirect effects (for example, improving productivity and effciency through spillover effects on the local economy) of FDI on China’s regional economic growth are analysed.lets try to examines the impacts of FDI on China’s regional economic growth by using the full sample of China’s 30 provinces. Then the chapter examines how the local economic and technological conditions of host provinces infuence the extent to which FDI contributes to local economic growth by subdividing China’s 30 provinces intodifferent province groups based on their economic and technological conditions. Let's try to 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. And also try to find that the contribution of FDI to economic growth is infuenced by local economic and technological conditions. FDI has a stronger impact on economic growth through capital augmentation and technological progress in the developed provinces than in the less-developed provinces. While FDI has a positive and significant impact on economic growth through knowledge spillovers in the developed provinces, the positive knowledge spillovers of FDI on economic growth are absent in the less-developed provinces.

This topic makes three contributions to the literature on the impacts of FDI on China’s economic growth. First, the empirical specifications used in this chapter not only include direct effects of FDI, but also enable us to examine the spillover effects of FDI on China’s regional economic growth. Second, by subdividing provinces into different groups in the estimations we can examine empirically how provincial differences in economic and technological conditions affect the extent to which the spillover efects of FDI contribute to provincial economic growth. Third, this chapter extends the period of the panel dataset to 2010, which is the most recent period in existing studies.

Theoretical explanations of how FDI contributes to developing host countries’ economic growth and presents a brief literature review on how the economic and technological conditions of a recipient economy influence the extent to whichFDI contributes to economic growth. The third section sets out the framework of analysis and specifies the empirical model. The fourth section describes the variables and the data. The fifth section presents the results from the regressions and explains the estimation results. The final section provides the conclusion and policy implications

FDI has played an important role in China’s economic development and export success.  According to the Ministry of Commerce (MOFCOM), foreign invested enterprises account for over half of China's exports and imports; they provide for 30% of Chinese industrial output, and generate 22% of industrial profits while employing only 10% of labor – because of their high productivity.  Evidence on technology spillovers is more limited, but industries with higher FDI seem to have higher productivity increases than other industries, suggesting a positive effect.  Importantly, foreign investment has catalyzed China’s economic reform.  Together, these contributions have supported China in maintaining a record-high 10 percent growth rate during most of the 1980-2010 period.  

China has been successful in mobilizing inward Foreign Direct Investment (FDI).  Attracted by the country’s investment opportunities and by its sheer size and growing domestic market, China received about 20 percent of all FDI to developing countries over the last 10 years and over $100 billion in 2008.  In terms of share of GDP and investment, FDI accounted for some 2.5 percent of GDP on average over the last five years.  While this may appear to be low it can be easily explained by the overall size of the economy: China is the third largest economy of the world, just behind Japan and the United States of America.

FDI Impacts on China’s Economy
Because of its unique nature and its importance, the economic literature and research attributes significant economic effects to FDI. During the past two decades, China has attracted huge amounts of FDI inflows and FDI firms have become an important element of the Chinese economy. What FDI is doing, how FDI
firms are behaving, and the impacts of FDI on China’s domestic economy have been a growing subject of discussion and analysis by policy makers as well as academic scholars in China and abroad. The following part of the paper summarises the main findings of the research conducted on this subject under the OECD/MOFTEC co-operation programme on this important subject. Some policy implications are presented in the concluding section of the synthesis note. impact of FDI on China’s international trade Since 1980, China’s foreign trade has registered an impressive growth. Between 1980 and 1998, its share
in world trade trebled, from less than 1 per cent to more than 3 per cent. The openness of China’s
economy, measured by the ratio of foreign trade to GDP increased from 12 per cent to 34 per cent. Thebconclusions of the research are convergent: FDI has been at the core of China’s foreign trade expansion. Furthermore, it has been a decisive factor in China’s involvement in the international segmentation of the
production process known as “globalisation”. Their conclusions are based on the following empirical evidence.
China’s comparative advantages
As predicted by economic theory, China’s major structural strengths in international trade have been concentrated in a limited number of labour intensive manufacturing products: leather and shoes, apparel,vmiscellaneous manufactured products (toys, sports goods, …). Its major structural weaknesses have been
located in capital and technology intensive goods: machinery, engines, intermediate textile products, and plastics. Ten sectors in which China had its biggest comparative advantage accounted for the bulk of China’s exports (58 per cent), and ten sectors in which it had its biggest comparative disadvantages accounted for the bulk of its imports (42 per cent). This reflect large disparities in factor endowments with
China’s foreign trading partners (the EU-15, the United States, Japan and the four new industrialised economies (Hong-Kong, Taiwan, South Korea and Singapore) and the existence of major inter-sectoral complementarities. In the same vein, China had positive net exports only in labour intensive products both in its trade with Asia and with the rest of the world.
China’s specialisation patterns have nevertheless evolved. Its comparative advantages in some of the more traditional sectors (clothing and knitwear, carpets) levelled off in the nineties, while new comparative advantages emerged and others diminished. In particular, China built up new comparative advantages in computer equipment, consumer electronics, electrical apparatus and household electrical appliances through a very rapid increase in exports. At the same time it gave up its comparative advantage in threebsectors, among which crude and refined oil.

These shifts in specialisation also changed China’s position in world trade. While in 1997 China still held the largest market shares in traditional industries (between 12.5 per cent and 22 per cent of world exports of leather products, clothing, carpets, miscellaneous manufacturing), it increased its market shares in the most rapidly expanding world markets (telecommunication equipment, computer equipment, electrical apparatus and equipment).
There is little doubt that China has the trade structure of a developing country. However, inter-sectoral trade specialisations seem more deeply entrenched than is the case of most other developing Asian countries. This can be attributed to China’s size and large resources of low-cost labour which make it possible to sustain a continuous expansion of labour intensive exports. In other words, China has been able
to diversify its exports of labour intensive products and establish competitive positions in rapidly expanding markets, thus succeeding in sustaining a rapid export growth.

Increased participation in the international segmentation of production
The study tested the pattern of China’s revealed comparative advantage according to stages of production
and increased participation in the international segmentation of production.
Looking at exports, it was found that final goods (consumer goods and capital goods) doubled their share between 1980 and 1997 to reach the level of 55 per cent. Exports of consumer goods accounted for 38 percent of exports or twice the share of capital goods (18 per cent) in 1997. However, while clothing was still the most important export item, exports in consumer electronics, domestic electrical appliances and instruments were the most dynamic consumer goods. Capital goods took the lead in export growth in the nineties. This change was mainly driven by electrical equipment and apparatus, computer equipment, telecommunications equipment. In short, within the final goods category, exports tended to shift from consumer goods to equipment goods, and from one chain of production (textile industry) to another chain of production (electric and electronic industry).

The relative importance of intermediate goods and basic manufactured products in exports did not change much (around 8-10 per cent). By contrast, the dependence of China’s exports on primary products dropped .

According to CEPII’s eight stages of production classification: primary products, basic manufactured, intermediate goods, equipment goods, mixed products, consumer goods and others.sharply, from almost 40 per cent in 1980 to around 7 per cent in 1997. Products responsible for the relative contraction of primary exports were crude oil and non-food agricultural products.

On the import side, productive goods (intermediate goods and basic manufacturing, capital goods) held a dominant share with 60 per cent of total imports in 1997. Intermediate products accounted for the largest part of Chinese imports by stage of production in 1997 (28 per cent). Moreover, they increased slightly
faster than overall imports since 1980. Textile products made up more than one third of imports in intermediate goods, but since 1990 electronic components have been the most dynamic export sector and reached more than 10 per cent of intermediate imports in 1997. Capital/equipment goods represented the
second most important import category after intermediate goods or almost one fourth of imports in 1997.
Machinery was the most important import item in this category while electrical apparatus and equipment, telecommunication equipment and computers were the fastest growing import sectors.
Thus the analysis of the pattern of comparative advantage by stage of production shows that, in 1997, China’s weaknesses were heavily concentrated in intermediate products and to a lesser extent in capital goods. China’s strengths were concentrated in consumer goods. This pattern of specialisation indicates that
China may be involved in the international segmentation of the production process and specialised in the assembly and transformation of imported intermediate goods for export. This specialisation in assembling operations has been well entrenched in the textile industry and has risen rapidly in more technologically
advanced industries.
The impact on China’s trade growth
Over the 1992-1998 period China’s foreign trade expanded rapidly: in dollar terms, exports more than doubled and imports increased by 75 per cent.
The distribution of exports by category of firm suggests that foreign invested enterprises (FIEs) have been responsible for almost all the visible improvement in China’s export performance. From 1992 to 1998, total Chinese exports rose from 2.3 per cent to 3.4 per cent of world exports. Over the same period, FIEs in
China increased their share from 0.5 per cent to 1.5 per cent of such exports. Domestic firms registered some gains in the first half of the nineties but lost ground afterwards and in 1998 they held the same share as in 1992 (1.9 per cent).
On the import side China’s share of world trade rose to 2.6 per cent between 1993 and 1996 and then declined slightly to 2.5 per cent in 1998, as a result of a slowing down domestic demand. FIEs led import growth and their share in world imports doubled from 0.7 per cent to 1.4 per cent, overtaking that of domestic firms. Impact studies underline that host country policy has an important policy influence on the
links between foreign affiliates and the rest of the economy. Like other Asian economies, China has followed a trade policy which has combined export promotion together with relatively strong import protection measures. With regard to FIEs, China has applied a selective policy which has included preferential treatments (tariff and fiscal exemptions) in export oriented sectors and sectors targeted for import substitution policies, but also applied severe constraints in other sectors (limited access to the domestic market). The result has been the establishment of a dualistic trade regime for domestic and
foreign firms.
) The role of FIEs in processing trade
What is the root of FIEs’ outstanding export performance? Research attributes China’s outstanding export performance to FIEs’ international processing activities. In the nineties, processing trade increased much
faster than ordinary trade, as it benefited from tariff exemptions granted to intermediate products used in the production of exports. These concessionary imports amounted to 49 per cent of China’s total imports in 1998 (against 39 per cent in 1992) and exports associated with concessionary imports reached 57 per cent
of total exports in 1998 (47 per cent in 1992). FIEs took a major part in the rapid growth of processing trade. FIEs were responsible for 70 per cent of China’s imports for processing and for 66 per cent of its processed exports. Over the period 1994-1998 FIE processing activities were by far the most dynamic component of China’s trade and they represented almost 38 per cent of Chinese total exports and 34 per cent of imports in 1998 (against 25 and 24 per cent respectively in 1994).
The main underlying assumption is that the overwhelming share of processing activities in foreign
affiliates’ trade reflects their role as a production base for parent companies which have relocated segments of production in China. Foreign firms, motivated by cost considerations, have transferred the downstream, labour intensive stages of production in China. China has thus become integrated in the international
segmentation of the production process. Most imported inputs for processing come from Asian countries, suggesting that Asian firms have taken a major part in this transfer of production capacities in order to maintain their competitiveness in world markets.
The data suggests that a dividing line separates imports from Asian countries on the one hand, and United States and the EU’s imports on the other. From Asian countries, FIEs located in China imported mainly intermediate goods to be processed and re-exported. A large part of these imports corresponded to the supply of inputs from parent firms to their affiliates and can thus be characterised as intra-firm trade.
(These firms include American and European affiliates in China which source their inputs in the region, thus contributing to the rise in imports from Asian countries.) Looking at the commodity composition, it was found that electrical equipment, plastics and textile products form the bulk of processing imports from Asian countries. This suggests that the share of Asian countries in China’s imports does not reflect their
capacity to enter the domestic market but the fact that China had become a production base relying on supplies of intermediate goods from the region.
In contrast with FIE imports from Asia, however, FIE imports from the United States and the EU-15
concern mostly goods to be used or consumed domestically. This means that the foreign firms concerned follow a strategy aimed at the local market. FIEs’ imports of capital goods from Europe have accounted for an overwhelming share of China’s imports of machinery, electrical machinery and vehicles. The importance of machinery and equipment in China’s imports from the EU (36 per cent) can thus be directly
connected with FDI, confirming that European FDI activities in China have been oriented towards relatively capital-intensive projects. FIEs had only a relatively small share of China’s imports from the United States, whose commodity composition is more biased towards arms’ length trade (aircraft, fertilisers, agricultural products).
FIE exports to major markets were also heavily determined by processing trade. FIE processed exports were geared towards four main destinations: in 1997, the EU-15 received 12 per cent of these exports, Japan 20 per cent, the United States 24 per cent, and Hong Kong 25 per cent, most of which was to be
redirected towards the United States and Europe. China’s top export sectors to the EU-15, to the United States and to Japan, were thus heavily dependant on FIE processed goods; the only remarkable exception was the clothing industry, as most of its exports remained in the hand of Chinese firms.
FIE processing activities have led to bilateral trade patterns which help illustrate the reorganisation of production which has taken place in Asia (with China becoming an assembly base for finished products for the supply of world markets). For instance, foreign affiliates in China recorded a large surplus from their processing trade with the EU and the United States. They had a relatively balanced processing trade with
Japan, an indication that intra-firm trade played an important part in Japan-China two-way trade. However, they had a large processing trade deficit with Taiwan and South Korea. Their processing trade surplus with Hong Kong was also the result of bilateral trade flows passing through the territory. If these flows were
attributed to actual partners, the existing bilateral imbalances would be even more accentuated: it would increase China’s surplus with the United States and the EU and its deficit with Taiwan and South Korea.

) The comparative trading performance of FIE firms
The research found similarities as well as differences in FIE firms and China’s domestic firms’ export dependence. First, both China’s domestic firms and FIE firms relatively concentrate their exports in labour
intensive manufactured products. This implies that both China’s domestic firms and FIE firms are making the most of China’s comparative advantage in labour intensive manufactured products in international trade. Second, the exports of some traditional capital intensive products have a relatively important
position in the total exports of manufactured products of China’s domestic firms, while the exports of some fast growing technology intensive products are playing increasing roles in the total exports of manufactured products of FIE firms.
These differences reflect in fact differences in the industrial structure of FIEs and domestic firms. First, the industrial structure of FIE firms is more biased towards labour intensive industries compared to China’s domestic firms. Second, FIE firms are relatively more concentrated in the newly developing and fast growing export-oriented industries than China’s domestic firms.
It thus appears that foreign firms have strengthened – and will continue – to raise China’s comparative advantage in labour intensive industries and increase China’s labour intensive product exports. FIE firms
have also improved and will further improve China’s export structure from the one which is composed of exports of labour intensive products plus traditional capital intensive products to the one which is characterised by the combination of the exports of labour intensive products and technology intensive products.
Looking at exports in the manufacturing sector, FIE firms do show an apparent tendency to export significantly more the China’s domestic firms. On average nearly 39 per cent of the FIE firms’ sales were exported, while only less than 10 per cent of the Chinese domestic firms’ sales were exported. The difference in the export behaviour between FIE firms and China’s domestic firms is even more significant
in labour intensive industries and in technology intensive industries. For the FIE firms, the export to sales ratio was 46.21 per cent in labour intensive industries and 45.29 per cent in technology intensive industries, while for the Chinese domestic firms, the export to sales ratio was only 14.5 per cent in labour intensive
industries and 7.82 per cent in technology intensive industries. The sharp difference between FIE firms and Chinese domestic firms in export behaviour confirms that FIE firms in China are more export-orientated than China’s domestic firms.
FIE firms have dominated most major manufactured exports from China. In 1995, FIE firms accounted for 51.19 per cent of China’s total manufactured exports. In terms of the industry groups of factor intensity,
FIE firms accounted for 51.4 per cent of China’s total labour intensive manufactured exports and for 69.75 per cent of China’s total technology intensive manufactured exports. In the industries of leather & fur products, furniture manufacturing, printing & recording, plastic products and instruments & meters the
shares of FIE firms’ exports ranged from 71.84 per cent to 78.98 per cent of the industries’ total exports.
The most significant percentage is in the electronics & telecommunication equipment industry, in which the share of FIE firms’ exports accounted for 94.45 per cent of the industry’s total exports. Research suggests that the participation of FIE firms in China’s manufacturing industries, particularly in
the export-oriented industries, has, and will continue to raise productive efficiency and international competitiveness in China’s manufacturing industries in general and in the export-oriented industries in
particular. But the linkage effects of these export-oriented FIE firms might not be as great as their impressive export shares might suggest. This is because, as already noted in section (3), FIE firms’ exports are almost exclusively confined to assembled and processed products using mainly imported materials or
components. In 1998 as much as 85.45 per cent of total FIE firms’ exports, or 69.18 billion US dollars, were for assembled and processed products. This may imply that the linkage effects, especially the backward linkage effects, that FIE firms may have on indigenous firms, may be quite limited.

Another explanation is that FDI in China’s manufacturing industries is still in its very early stages and mainly involved in the activities making use of China’s unlimited supply of low cost labour.

) Building Dynamic Specialisation
The following factors provide a good explanation of how processing trade accentuated China's
specialisation in labour intensive stages of production. China’s leading export sectors are heavily dependant on FIE processing activities which accounted in 1997 for more than 60 per cent of its exports in electrical machinery, machinery, footwear, instruments; the only remarkable exceptions were the more
traditional export sectors (textile, iron & steel, fuels). FIE processing trade had also been the major factor behind the diversification in favour of more technologically advanced products, with rapidly expanding markets (electrical machinery, instruments).
Processing trade has accelerated structural changes in China’s trade. Foreign direct investment, driven by cost considerations, has induced China to build up comparative advantages in new manufacturing sectors,
based on an in-depth specialisation along the production process. China has specialised in the downstream segments of production (assembly) in which it has a comparative advantage, relying on imports of intermediate goods and components. As far as the imported intermediate products incorporate high technology, they may be a channel for technology transfer into the Chinese manufacturing industry.

) Domestic penetration of FIEs
FIE firms have contributed significantly to China’s manufactured exports, a large portion of FIE firms’ sales has actually entered China’s domestic markets. In 1995, of the 954.19 billion yuan sales from the FIE firms, 61.37 per cent or 585.54 billion yuan were sold to China’s domestic markets. This represents a share of 15.37 per cent of China’s markets for domestically produced manufactured products. Domestic sales of FIE firms concentrated in transport equipment (12.68 per cent of FIE firms’ total domestic sales), electronics and telecommunication equipment (10.29 per cent), food processing (7.81 per cent), electrical
machinery and equipment (6.73 per cent), textiles (6.68 per cent) and chemical materials and products (6 per cent). Together the above six industries accounted for 50.19 per cent of FIE firms’ total domestic sales.
In some manufactured product markets, FIE firms have already gained prominent domestic market shares.
In 1995, FIE firms’ domestic market shares in China reached 40.13 per cent in electronics &
telecommunication equipment, 36.12 per cent in clothing & other fibre products, 31.37 per cent in leather & fur products, 29.25 per cent in food manufacturing, 26.19 per cent in instrument & meters, 25.83 per cent in beveragemanufacturing and 24.87 per cent in transport equipment industries respectively. The market shares of FIE firms are expected to rise as more and more large MNEs enter into China’s markets.
Unlike the early arrivals of small and medium-sized and labour intensive firms from Hong Kong and Taiwan, the new entrants of large MNEs, equipped with modern technologies, mainly target China’s huge and under-exploited domestic markets. Therefore, the presence of FIE firms has forced and will continue to
press China’s domestic firms to improve their performance in order to prevent their market shares from shrinking even further. Such impacts of FDI on China’s domestic economy may be much more profound and important than just a means of contributing to China’s export growth.

) Rising Local Content
Since 1994, processing trade has been responsible for a growing part of China’s trade surplus. The ratio of exports after processing to import for processing steadily increased. This processing trade surplus can be seen as an indicator of the value added in China. Apart from the appreciation of the yuan, this result may
be attributed to the growing integration of the production process in the mainland, which has included more stages of production and related services (packaging, marketing) which used to be made outside the mainland. The declining role of Hong Kong in China’s exports, also means that products made in China are now more directly sold in world markets. It would appear, however, that domestic firms’ processing trade generates relatively more apparent value added than FIEs. Domestic firms source more naturally
inputs in the domestic market. FIEs have generally a higher propensity to import intermediate goods.
Foreign firms may tend to concentrate their activities in the most simple manufacturing industries and in the most basic production stages. It is also possible that the practice of intra-firm pricing may lead to an underestimation of local content.

) FIE Export Competitiveness and Exchange Rate Policy
One interesting finding is that processing trade may have isolated China from exchange rate fluctuation as a large part of exports and imports from such trade are denominated in foreign currency. During the Asian financial crisis, the Chinese currency strongly appreciated, in real terms, against most Asian currencies and
this raised the fear that China would have to devalue or would incur a large trade deficit. In fact, while “ordinary” exports declined by 5 per cent in 1998, FIE processing exports continued to rise (+8 per cent).
To a large extent therefore the resilience of Chinese exports during this period can be traced back to processing trade and especially to FIEs processing trade.

) Domestic firms have lagged behind
Since 1992 domestic firm trade has clearly lagged behind foreign firm trade. There is no evidence, however, that domestic firms have suffered from the competition of FIEs which would have displaced their exports. This results from the fact that domestic and foreign firms have followed divergent specialisation
trends.
Duties exemptions also seem to have played a role in the difference in export competitiveness to China’s duties exemptions in favour of foreign firms. Virtually all imports of machinery by FIEs benefited from duty exemptions in 1997, as they corresponded to initial equity investment or to assembly trade. Imports of machinery by FIEs represented almost 70 per cent of the total amount of machinery and equipment
imported by China in 1997. This means that less than one third of imported equipment was directed to domestic (wholly Chinese) firms, which in turn accounted for more than 80 per cent of domestic industrial production. This unequal access to imported equipment has certainly been a contributing factor in domestic
firms’ performance.

Regional Disparities have increased
The research suggests that FDI has strongly influenced the economic openness of the different Chinese regions as the presence of FIEs in provincial economies largely determined their involvement in foreign trade. FDI has been heavily concentrated in the coastal provinces. Foreign trade concentration in these regions has grown even faster. From 1992 to 1997, inland provinces have received less than one fifth of
FDI and in 1997 they were responsible for less than 10 per cent of foreign trade (12 per cent in 1992). The rapid expansion of export oriented industries based on imported inputs had accelerated the integration of coastal economies in international trade and production networks but this may have been achieved at the
expense of backward and forward linkages with the rest of the economy and especially at the expenses of inland economies.

(12) The impact on China’s balance of payments
As noted previously, China’s FDI policy has enabled FIE enterprises to become the major force in China’s
foreign trade development. FIE enterprises account for 48 per cent of the aggregate growth of China’s exports since 1981. The robust export growth rates of FIE enterprises’ exports has resulted in an annual
foreign exchange surplus for FIE enterprises in general since 1986. In recent years, FIE enterprises have been able to maintain their foreign exchange balance with a surplus in foreign trade. All these factors have
contributed to the improvement of China’s balance of payments and the increase of China’s foreign exchange reserves. Two factors will be crucial in the future for the maintenance of this situation, namely the trade behaviour of FIE enterprises and the size of FDI inflows. Whether China will be able to maintain a balance of payments surplus will depend on whether enterprises, especially FIE enterprises, continue to expand exports and whether China will continue to absorb large FDI inflows.

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