The Impact of Foreign Direct Investment on China’s Economy

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FDI includes investments in physical assets such as plant and machinery and it is based on equity ownership of at least ten percent (Forfas, 2002). The main types of FDI are the acquisition of a subsidiary or production facility or participation in the joint venture, licensing, and establishing of Greenfield operations. FDI has been growing faster than the world GDP and is now a major component of foreign investment (Razin Sadka, 2005). The effect of FDI on GDP is higher than the effect of other forms of foreign investment. Studies suggest that FDI triggers technology spillovers, assists human capital formation, creates a competitive business environment, and enhances enterprise development (Tusiad Yased, 2004). The FDI inflow in China had mixed impact which ranged from an increase in GDP, expansion of foreign trade, increase in fixed investment, reduction in unemployment, technology transfer while creating disparities in income across different regions within the nation.The sudden emergence of China as the FDI recipient has gained importance. From an isolated economy in 1979, China has become the largest recipient of FDI in the developing world and globally the second, only next to the United States (Zhang, 2001) because of its proactive policies towards FDI (Fung, Iizaka Tong, 2002). China’s distinction is its enormous population and its huge size. China experienced an FDI boom for seven years from 1992-1998 and the factors that contributed to it included further liberalization of the FDI regime in China coupled with the explosive growth of the domestic economy. Another interesting feature was that most of the FDI came from Hong Kong, Taiwan, and other Asian countries and not from the western nations. The Asian FDI concentrated on labor-intensive low-technology goods like garments, toys, and shoes meant for the international market. The western-FDI placed emphasis on capital-intensive goods like machinery, chemicals, and services.