Foreign direct investment and economic growth in China's Regions, 1979-2003.

Wei, Kailei (2008) Foreign direct investment and economic growth in China's Regions, 1979-2003. PhD thesis, Middlesex University. [Thesis]

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From 1978 to 2007, China has gone through 30 years of exciting economic development and social changes. In this thirty-year period, China's gross domestic product (GDP) increased from 0.36 trillion RMB to about 24 trillion RMB in current prices, or a 14 fold increase in constant prices. On a per capita basis, real GDP increased over ten fold during the same period. It is predicted that China will overtake Germany to become the world's third largest economy in 2007 or 2008. In 2006, China became the world's third largest exporter, moving from the 23rd place in the world ranking in 1978. By 2010, China will become the world's largest exporter, overtaking both the US and Germany. From 1994, China has been the largest host country of foreign direct investment in the developing countries and the second largest in the world after the US. Over 1979-2006, China accumulated a FDI stock of $692 billion. The total trade volume in 2006 was $1.76 trillion, generating a surplus of $177 billion. By November 2007, China had accumulated a foreign exchange reserve of $1.45 trillion, which was the largest in the world.

The emergence of China has probably induced the most profound impact on the global social, economic and political order in world development history as the momentum of China's economic growth is predicted to last for at least another two to three decades.

Economic development in China over the last thirty years can be divided into two main stages. The first stage was from 1978 to 1991, when the economic development strategy
was characterized by institutional reforms in agriculture and industry. Agricultural reform began with the introduction of the rural household production responsibility System in 1978. By 1984, rural reform had made remarkable achievements in grain output, farm income, land productivity, and above ail, poverty reduction. The success of agricultural reform provided a solid foundation for the reforms in the industrial and urban sectors, starting from the early 1980s. As the urban industrial economy was dominated by state ownership, especially the state-owned enterprises, similar reforms methods that were proved successful in the countryside such as the production
responsibility did not work very well in the cities. As a result, urban and industrial reforms encountered far more complication and difficulty in the 1980s and 1990s. To
break the iceberg of the traditional Chinese planned system, opening was an important strategy of Deng Xiaoping to change the urban industrial economy to a market-oriented
system. This was why China began with four special economic zones and 14 open coastal cities in the 1980s to experiment with capitalism and market in order to demonstrate that state-ownership and socialist planning can be substituted by, or at least supplemented with market capitalism.

The second stage of China's economic reform started from 1992 after Deng Xiaoping made his tour to South China to encourage the people in the south, especially in
Guangdong, to move faster towards a more open and market-oriented economy, allowing the inflow of foreign capital in large scale. Only after 1992 did foreign direct
Investment (FDI) become a significant phenomenon in China's economic growth. Before 1992, FDI was allowed in the special economic zones and open coastal cities on
an experimental basis. The amount of FDI was small because the government and the people did not have experiences in attracting foreign capital and were afraid that FDI
could change the nature of the socialist state and the nature of the communist party. However, the difficulty in reforming the state-owned industrial sector also meant that if the government did not allow foreign capital to flow into China, it would have been impossible to achieve the reform objectives, one of which was to increase China's
international competitiveness and industrial productivity.

In short, economic reforms during 1978-92 can be regarded as reforms of domestic institutions and reforms after 1992 can be regarded as openness, export-push and globalization. One of the key elements of reforms after 1992 is FDL The role of FDI in China's economic development is not necessary to make up the shortfall of investments in the country as China has maintained a high saving rate since economic reforms. The most important contributions of FDI to the Chinese economy include technological transfer, competition, and export promotion. This thesis uses the most up-to-date and comprehensive data covering all the Chinese provinces over the period 1979-2003 to examine how FDI has contributed to economic growth. The growth models and the empirical results prove the following two important hypotheses: (1) FDI is a mover of production effîciency. It means that the presence of FDI helps domestic firms to reduce production inefficiency. (2) FDI is a shifter of the domestic production frontier. This means that FDI can help China to move to a higher technological production frontier so that for the same amount of inputs, China is able to produce more outputs, ceteris paribus, because the embedded technologies in FDI have brought about new technologies, production processes and management that were not existent within the country before.

In the literature, few researchers have argued against the positive contribution of FDI to economic growth in China, but many have argued that FDI must have contributed to the
rising income inequality, especially regional income inequality in the country. One important problem emerging from China's fast economic growth over the past three
decades is the ever rising income inequality. Spatial inequality is an important part of total inequality. It happens that the pattern of this inequality is coincided with the pattern of FDI distribution. The east region has taken a lion's share of FDI whilst the inland regions assume a small portion. This thesis analyses both the patterns of income and FDI distribution across the provinces. It suggests that FDI cannot be blamed for
regional inequality. Instead, it is the unequal distribution of FDI that has been responsible for the rising regional inequality. Consequently, the government should encourage, rather than discourage FDI to reduce regional income inequality, but the inflows of FDI must be directed more towards to the inland regions in the future.
Another part of this thesis is to identify the main determinants of FDI in China. It is shown that market size, measured by GDP, infrastructure, population density, human
capital, exchange rate, location and government policies are important factors influencing the inflows of FDI into China.

The main conclusions in this thesis are as follows: (1) Fast economic growth in China has been helped by the massive inflows of FDI. (2) FDI helped domestic firms in
improving competition and productivity. FDI also helped improving China's technological progress. Over the period 1979-2003, total factor productivity in China
increased about 4% per annum and the contribution of FDI was roughly one-third of this productivity growth. Technological progress in China exhibits a two-steps waterfall shape, Coming down from more than 4% in the east, to less than 2% in the central, and to less than 1% in the west. (3) FDI cannot be blamed for the rising regional inequality in China. FDI should be encouraged, especially in the inland areas, to promote growth and to reduce regional inequality. (4) FDI inflows have been affected by many factors, among which government policies and macro-economic environment are important. To promote FDI, the relatively backward areas in the west and the central regions should be given more preferential policies, including taxation, infrastructure and education.

Item Type: Thesis (PhD)
Additional Information: This PhD dissertation is the finalized version to be submitted to the Business School, Middlesex University, London, U.K.
Research Areas: B. > Theses
A. > Business School > Economics
Item ID: 8034
Depositing User: Devika Mohan
Date Deposited: 26 Jul 2011 05:56
Last Modified: 21 Jun 2021 16:44

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