Foreign Direct Investment in China: Location Determinants, Investor Differences and Economic Impacts

321 Pages·2011·3.422 MB·English

by  Chunlai Chen

Foreign Direct
Investment in China
Location Determinants, Investor Diff erences
and Economic Impacts
Chunlai Chen
The Australian National University
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
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© Chunlai Chen 2011
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, electronic,
mechanical or photocopying, recording, or otherwise without the prior
permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2011929459
ISBN 978 1 84980 388 5
Typeset by Servis Filmsetting Ltd, Stockport, Cheshire
Printed and bound by MPG Books Group, UK
2
0
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Contents
Foreword by Christopher Findlay vii
Preface ix
Acknowledgements xi
List of abbreviations xii
1 Introduction 1
2 The evolution and main features of China’s FDI laws and
policies 33
PART I LOCATION DETERMINANTS
3 Location determinants of FDI and China’s performance in
attracting FDI infl ows 85
4 The impact of China on FDI infl ows into other developing
countries 114
5 Provincial characteristics and the FDI location decision
within China 132
PART II INVESTOR DIFFERENCES
6 Composition and investment intensity of source countries in
China 155
7 FDI in manufacturing and comparison of overseas Chinese
affi liates and foreign country affi liates 173
PART III ECONOMIC IMPACTS
8 The contribution of FDI to China’s economic growth 213
9 Spillover eff ects of FDI on China’s domestic fi rms’
productivity 232
10 Spillover eff ects of FDI on China’s domestic fi rms’ exports 249
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vi Contents
11 Conclusion, policy implications and prospects 266
References 288
Index 301
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Foreword
Chunlai Chen has written an important book about the Chinese economy.
Here he documents the growth of foreign direct investment (FDI) fl ows
into China, their determinants and their eff ects, not only in China but also
in the rest of the world.
The China FDI story is a remarkable one. As Dr Chen writes, not so
long ago FDI was banned in China. Today the accumulated infl ow is
around $US1000 billion. The annual growth of the infl ow was over 30
per cent a year in the 30 years since 1979. During 2000 to 2009, China
accounted for 6 per cent of world total infl ows and 17 per cent of FDI
infl ows into developing countries. China has become the largest recipient
among developing countries.
This transformation certainly deserves attention, and Dr Chen brings
his life’s research together in this volume for that purpose. He does that
with good organization and great clarity, and with the application of pow-
erful research methods.
The book covers some of the big questions in the study of FDI fl ows – is
China too big as a recipient, why does the sectoral distribution look odd,
why is the source of the infl ows unusual and why have some provinces
missed out?
The book contains some remarkable fi ndings. Dr Chen identifi es the
uneven patterns of FDI infl ows across regions of China and comes up
with an explanation for that. He analyses the sources of the infl ows: he
fi nds that over three- quarters come from other countries and economies in
the region, such as Hong Kong, Taiwan, South Korea and Singapore. The
role of the big developed countries is less than might have been expected.
The growth in FDI is a manufacturing phenomenon, but is increasingly in
technology intensive activities. Dr Chen provides an explanation of these
trends. He designs an index of attractiveness at provincial level that will be
of great interest to policy-m akers working on their country’s FDI strategy.
Dr Chen also examines and identifi es diff erences in behaviour of investors
of diff erent origins. This, too, will be important reading for FDI agencies.
There has been a concern that China has attracted ‘too much’ FDI.
By studying the determinants of FDI fl ows and applying that analysis
to China, Dr Chen fi nds that, on the contrary, China’s performance was
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viii Foreword
only moderately above what might have been expected. He also fi nds that
infl ows into China are associated with a positive eff ect on infl ows into
other developing countries. Dr Chen identifi es a couple of contributors to
this result.
With respect to impacts of FDI, Dr Chen looks at the eff ects on growth
at the aggregate level, on productivity at the fi rm level and on exports. The
book reports on empirical work on a series of linkages between foreign
and domestic fi rms which is not often studied.
With this background, Dr Chen also draws out some policy lessons. He
refers to the questions of national treatment, regional development strate-
gies, incentives for investment in particular industries, and mechanisms for
enhancing the positive eff ects on domestic fi rms.
This book is written by a researcher in touch with the big questions
about China and about FDI. It is also written by someone who is a great
teacher. The skills of the teacher to mobilize interest in a topic and then
explain and digest material which is relevant are all evident here.
Christopher Findlay
School of Economics
University of Adelaide
14 April 2011
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Preface
Foreign direct investment in China has been one of the most successful
aspects of China’s economic reform and opening up to the outside world.
The gradual liberalization of restrictions on FDI since 1979, the govern-
ment’s commitments for further opening up, particularly the commitments
to the World Trade Organization in trade and investment liberalization,
have greatly improved the overall investment environment in China.
Foreign fi rms have been attracted by the huge domestic market and pool
of relatively well- educated, low-c ost labour, which has made China one of
the most attractive destinations for FDI in the world.
Over the course of the past three decades, FDI became well established
in China’s economy, and the activities of multinational enterprises came
to assume increasing importance in capital formation, labour training,
technology transfer, international trade, and in accelerating the transition
of China from a planned economy to a market economy. As a result,
FDI has increasingly integrated the Chinese economy into the world
economy.
This book presents a comprehensive analysis of FDI in China. It pro-
vides a remarkable background of information on the growth of FDI
infl ows and the evolution of China’s FDI policies for the past 30 years;
a thorough analysis of the leading theoretical explanations of FDI and a
series of rigorous empirical examinations of the location determinants of
FDI; a comprehensive analysis of the diff erences in investment and pro-
duction behaviour between the major investors; and an in-d epth investiga-
tion of the impacts of FDI on China’s economy.
The results of this study provide us with much insight into the general
issues of FDI in developing countries. In particular, this study extends our
knowledge in three main ways: (1) greater understanding of the general
causes of FDI from the aspect of the ‘demand- side’ factors by focusing
on investigating the location determinants aff ecting inter- country and
inter- region distributions of FDI; (2) better knowledge of the diff erences
between the developing source economies and the developed source
economies in their investment relationships with China, and the distinctive
features of the investments from the overseas Chinese investors as com-
pared to those from the foreign country investors; and (3) further evidence
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x Preface
of the impact of FDI on economic growth, the spillover eff ects of FDI on
productivity and exports of domestic fi rms in the case of FDI in China.
I hope this book will be a valuable source for scholars and students who
are interested in FDI studies in general and in Chinese economic studies in
particular, and also be of interest to a wide range of readers.
Chunlai Chen
The Australian National University
Canberra, Australia
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Acknowledgements
This book was completed with the support of many people. First, I am
very grateful to Professor Christopher Findlay, who inspired my research
interest in foreign direct investment when I was a PhD student under his
supervision, and that of Professor Andrew Watson during 1994 to 1998
in the University of Adelaide, Australia. Their profound knowledge both
of economic theory and of China greatly benefi ted my study. I sincerely
thank Professor Findlay for his encouragement, valuable comments and
substantive advice on drafting and publishing this book.
I would like to thank Dr Yu Sheng for his technical assistance with the
regressions in Chapters 9 and 10.
I wish to thank the Crawford School of Economics and Government
at the Australian National University for providing the excellent research
facilities. I also wish to thank the China Economic and Business Program
in the Crawford School of Economics and Government, particularly
Associate Professor Lignag Song for providing me with fi nancial assist-
ance in editing this book. I would like to thank Dr Nicola Chandler for her
excellent editing of the work. And I also would like to thank Edward Elgar
Publishing for publishing the book.
Finally, I would like to give my special thanks to my family – my father
Hongjin Chen, my wife Tessia Deng and my son Christopher Chen – for
their love, encouragement and support. The understanding and support,
especially from my wife Tessia, were of immeasurable value throughout
the course of my writing of this book.
Chunlai Chen
Canberra, Australia
March 2011
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