The Impact of Inward FDI on China’s Economic Growth
Effect of FDI on China’s Economy
A rudimentary explanation of inward FDI, which has been instrumental in catapulting China’s economy to its current level, is an investment that involves external or foreign entities either investing in or purchasing of goods and services from a local economy. Since the turn of the century, China has undergone a serious transformation and set out on a quest to mobilize inward FDI. It is a fair assessment to state that the country’s efforts have thus far been immensely successful. Global figures on FDI stood at $1.39 trillion in 2019, and China held a sizeable percentage of this figure with flows of over $140 billion. Coupled with its sheer size, and ever-growing local market, the nation has very attractive investment opportunities that have lured foreign investors in huge numbers. Over the past ten years, FDI has contributed to an average of about 2.5% of the nation’s GDP. The figure appears to be low because of the size of the country’s economy. The significance of inward FDI to the state cannot be overstated. Between 1980 and 2010, the contributions of foreign investments were the driving force in China’s record-high 10% economic growth rate.
Chen (2014) posits that China’s reforms have been market-oriented since 1978 when the country opened up, and its economy began making significant changes that would eventually lead to the powerhouse that is the world’s second-largest economy (Chen 2014). As an investment option, China offers numerous advantages chief among them being an enormous local market. Its population of close to 1.4 billion people provides the potential for any willing investor to reap huge rewards. Other than population, foreign firms are attracted by the low-cost labor that is reasonably well-educated. Further, Chen also asserts that research demonstrates that the positive effects of FDI to a country do not occur solely from investing in the nation. Instead, for the state to reap the full benefits of FDI, other factors such as economic and technological conditions must also be favorable. The case was no different for China which experienced different growth rates in different cities as a result of foreign direct investments wherein investors paid keen attention to the level of technology in a specific city before opting to invest. Provinces that were more developed significantly benefitted from foreign investments, and they have continued to grow ever since. The discrepancy in investment and development is apparent even today as provinces such as Hebei and Guangdong stand head and shoulders above many of the others. The overall impact of FDI has been more visible in the east than it has been in areas such as central and western China. FDI plays a more significant role other than increasing tax revenues and boosting China’s international appeal. It has also managed to shift the production frontier and improve its efficiency simultaneously. The localized effect of FDI, more specifically, on regional economic growth in China, is also explored by Liu and Agbola (2014). They analyze data spanning 20 years- from 1989 to 2009- to depict the impact of inward FDI on China’s electronic industry. Their analysis of the effects of FDI on the nations electronic industry takes a specific focus on the western, central, and coastal regions. There was an apparent and vast discrepancy in economic development in the three areas. The difference in developmental levels not only indicates the essence of advanced technology where FDI is involved, but the convenience of location as well.
One of the most prominent contributions of FDI to China’s economy has been a marked increase in manufacturing exports. Foreign-invested enterprises have also risen, which has led to the augmentation of the volume of exports and resulted in a transformation in the structure of exports (Chen, 2014). The value of exports grew almost tenfold between 1980 and 1998, with the figure moving from $18 billion to $184 billion. The capital formation that describes the value of capital goods, including electricity, assets, tools, transportation, and equipment, also benefited from an increase in foreign direct investments, which made their way into China. This growth is attributable to a robust manufacturing industry that has grown to meet the nation’s export demands. The growth in capital formation has, in turn, increased industrial output, created more jobs, and added to the country’s tax revenue. There has been a clear development of the correlation between FDI and GDP. The ratio of the two was negligible from 1978 all the way through to 1991 when it grew to about 4% and five years later in 1999 stood at 15%. The foreign companies in the country have eased the pressure of unemployment and also contributed to the tax collected by the central government. There can be no doubt that foreign direct investments have had a profound effect on the Republic’s economic growth.
China has also undergone significant policy changes regarding FDI that have contributed to economic development. One of the views that changed drastically to accommodate foreigners, foreign ideas, and companies was on liberalization (Hertenstein 2017). During the 1980s and part of the 1990s, there existed no market institutions, and China began experimenting with the concept of opening up a few cities in the coast to accommodate FIE’s and created special economic zones that were explicitly aimed at attracting export-oriented FIEs (Liu & Agbola, 2014). However, perhaps the most significant statement of intent that China made to show its commitment to the liberalization of services was the accession of the World Trade Organization. It took a long and arduous 15 years for the accession process to be finalized, and the nation made significant headway in its efforts to liberalize trade and reduce existing barriers. The immediate and apparent effect of becoming an active member of the WTO was opening up its borders to investors who were looking to do business in and with China. As expected, the country’s economy grew significantly following this move as investors began to view the country as unrestricted by the previous rules and regulations, which made it seem distant and out of touch with modern economies. Investors quickly flocked into the country and set up new companies in almost every sphere, most notably in technology. The once-powerful monopolies and oligopolies were slowly broken and forced to keep up with the new entrants into the market to retain clients. This newfound “invasion” brought with it a higher flow of FDI. In turn, it promoted a conducive atmosphere for further transformation and stimulated competition in pushed the country further to becoming integrated into the global economy. China has reaped significant benefits by opening up its doors and maintaining a steady balance of national policy and liberalization. The FDI flows will only continue to increase.
References
Chen, C. (2014). The impact of FDI on China’s regional economic growth. In R. Garnaut, C. Fang, & L. Song (Eds.), Deepening Reform for China’s Long-term Growth and Development (pp. 407-427). ANU Press.
Hertenstein, P., Sutherland, D., & Anderson, J. (2017). Internationalization within networks: Exploring the relationship between inward and outward FDI in China’s auto components industry. Asia Pacific Journal of Management, 34(1), 69-96.
Liu, W. S., & Agbola, F. W. (2014). The regional analysis of the impact of inward foreign direct investment on economic growth in the Chinese electronic industry. Applied Economics, 46(22), 2576-2592.