fdi in cina

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CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 INTRODUCTION
Generally speaking, more studies are being conducted concerning developing
countries to ensure that they have the tools and knowledge necessary to make the most
proficient use of FDI that is, focusing efforts on increasing economic development and
growth. In this chapter, there is a brief consideration of some empirical studies regarding
FDI. The hope therein is to understand better how China was able to best capitalize on
these new funds for faster economic growth.
2.2 EMPIRICAL LITERATURE REVIEW
Paraphrasing from a definition set by Branstetter and Fritz (514-515), FDI refers to
an investment by a foreign entity (governmental or business in nature) within a country to
establish a presence for profit or diplomacy. In this respect, FDI has the power to both
allow China to grow by foreign example as well as influence the development efforts of
other countries, over time (Williams, 2016). Most of the previous studies reviewed for this
thesis focused primarily on the positive side of FDI in economic growth. Given this
leaning, I wanted my review to exhibit greater balance betwixt the positive and negative
effects of FDI on an economy. Once this accomplishment, I could devise an empirical
methodology and analysis that could have real implications for entities interested in FDI.
It is also in this chapter where the discussion of the prevailing theories and the purported
relationships between FDI and growth takes place.

2.2.1 Overview of the Development of FDI in China
Until 1978, China was an isolated economy that never emphasized multinational
business operation, or, frankly, any permanent negotiations outside its local markets. Of
course, China, as a self-proclaimed “communist” nation, is still rather isolated and
antiquated in much of its thinking as a political body (Williams, 2006). However, after
1978, with the introduction of the now famous “open-door” strategies of Deng Xiaoping,
the Chinese government began to make changes in some of its policies regarding
isolationism; and, it was the impact of these policies that initiated both a new era of a more
liberated Chinese economy and the subsequent lessening of Chinese underdevelopment
(Ebrey, 2010). As one strand to these new policies, the Chinese government provided
incentives to encourage foreign markets to consider China as a destination for FDI dollars
(so to speak). According to China’s Ministry of Commerce, back in 2011, it was precisely
the inclusion of overseas markets that made China’s exports and imports rise by more than
half to record $262 billion in the year 2007 (Dehghani et al., 2016). For better management
of the tremendous inflows, the Chinese leaders decided to permit the introduction of
capitalist elements into its economy. From this, China leaders were able to free some efforts
from micromanaging the economy and redirect those efforts into maintaining political
stability across the country.
As per the OECD (2000), as well as Ren and Pentecost (2007), the distribution of
China’s open-door strategies was across three periods to accomplish their primary
objective, financial stability for the country. In the first, time frame, 1978-1983, regulations
on joint ventures sought to pull in investors from different nations and teach them all that

China had to offer as human capital and resource-rich country. Additionally, amidst that
period, particularly in 1980, the country's political-economic administration set-up four
special economic zones (SEZs). The consequences of this approach were quite positive,
and they were grounded in the idea that freeing FDI inflows would permit greater
dissemination of technologies and know-how into China. At this time, there was FDI
restriction to just these four areas (SEZs); but, the administration’s plan was a start in
creating a more internationally competitive China.
From this initial experimentation with the first, four SEZs (namely, Shenzhen, the
city of Zhuhai, Shantou in Guangdong and Xiamen in the Fujian region), the observed
successes established a positive precedent and causation between the freeing of FDI and
economic growth. The establishment of causation in the positive ramifications of the
program occurred when it was definitive that only those SEZs were shown to grow
disproportionately to the other regions of the economy. Of course, upon further
examination, it is, perhaps, no surprise that freed FDI in those highly trade-sensitive coastal
regions would lead to growth. After all, the Shenzhen region is near the British-enhanced
city-state of Hong Kong, and the other FDI-freed areas of Zhuhai and Xiamen are close to
the democratic and US-backed Taiwan and the historically affluent Macao, respectively.
Moreover, these urban areas are situated in regions of cultural and linguistic homogeneity,
which has shown to improve economic efficiency. However, despite these geo-economic
circumstances, the reality remained that these regions were still highly underutilized until
FDI was, firstly, permitted to enter those regions and, secondly, freed from the direct
oversight of China’s government. The move ultimately established success for the
program.

In 1930s, China recorded a modernization of the industrial sector, this therefore
championed a moderate but a very essential economic growth. Prior to the collapse of
international trade which was as result of the Great Depression, the share of China’s world
trade and the ratios of foreign trade to GDP recorded standards that were not salvaged for
over sixty years. The Chinese economy was largely affected by the second Sino-Japanese war
and continued during the Second World War and the Chinese civil war which occurred from
1937 to 1949 where the columnist who won the war implanted an organized economy.
Within this period, the economy of The People’s Republic of China was poorly
performing as compared to other East Asian Countries such as Japan, South Korea, and the
rival Republic of China. During this period, the economy recorded vast inefficiencies and lack
of investments, after the death of Mao, the leadership of Communist Party of China opted for
market reforms in order to save the sinking economy. Therefore, economic reforms started
after Deng who while was on power there was a widespread support for the economic
reforms by the elites, however, the party conservatives opposed his policies despite being
successful in the increase of a country’s wealth.
From 1978-1984 Deng Xiaoping initiated the first economic reform which began in
agriculture, this sector had been perceived to be mismanaged by the communist party for a
long time. This is because by 1970, the government officials warned for the likelihood of 1959
disaster repeating itself since the production and supply of food became deficient, Deng
responded to the warning by decollectivizing agriculture and stressing on the householdresponsibility system. This system helped in the dividing of the communist’s lands into plots,
the peasants were authorized to control their plots so long as they were able to sell their
portion of their products to the government.

From 1975 to 1985, this system increased by 25% the agricultural production hence
enabling privatization of other sectors of the economy, this approach was considered to be a
major factor in contributing to the success of the transition in the economy of China.
Exceedingly, a reform was also implemented in the urban industry to enhance productivity,
here, there was an introduction of dual-price system where industries owned by state were
permitted to sell any production above the plan quota, the system allowed commodities to be
sold at both the plan and market prices. Out of this implementation, development of state
owned enterprises were promoted, operation of private businesses were allowed, and the
country was open for foreign investments.

The second reform period commenced in 1984 and ended in 1991. In 1986, entirely
foreign-owned companies were formally recognized as licensed operators within the
Chinese market only in the determined SEZs. Additionally, organizations with progressive
technologies enjoyed special incentives to penetrate the Chinese market. At around the
same time, new legal measures were instituted to provide some oversights and investor
insurance programs (particularly special interest safeguards). These new programs
continued to bring growth to the regions mentioned above, which then spurred new
interests to develop more zones. It was then, at the early 1990s, that the foundation of Free
Trade Areas and High Technology Development Zones took place. Ultimately, to
accommodate the growing socio-economic status of the Chinese workers and households
of those regions, many of those zones opened to international organizations that operated
in retail as well as wholesale markets, banking industries, insurance, and consultancy
administrations. It bolstered an economically virtuous cycle of spending and production,
which reinforced the FDI programs.

The Purpose of Attracting FDI
The primary goal of attracting FDI is to increase the productivity of an economy,
either in pertinent areas or as a whole. It is a valid goal since FDI inflow is diverse as it
targets different sectors of the economy, talk of insurance or banking, thereby enhancing
volumes as every industry is in a position to produce quality. Technology is another reason
to attract FDI; the entities come with advanced machines for efficiency, and these, in the
end, would help trigger the quality and quantity of productions within the domestic
economy. Its significance follows by ensuring a competitive market environment in the
host country where local firms would ensure quality in their output, and in the end
customers would enjoy the very best at affordable prices. Through technological
investment as well as various fresh inflows from different economies, FDI is significant in
capital formation to the host country (Dehghani et al., 2016). When a country is
experiencing low human capital concerning managerial skills, FDI inflow becomes the best
solution. Such enterprises would bring the best to manage their investment and in the
domestic economy would learn via experience and training. In consideration to the
employment opportunities that the FDIs bring along, they help in solving the
unemployme...


Anonymous
Awesome! Perfect study aid.

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