Attached.

Study Background and Motivation
The Chinese economy adopted an open policy in the late 1970s by abandoning
long-term closed strategies. This change was the result of government inefficiencies as well
as of the influence of the capitalist system. For this fundamental reform, China considered
partisan policies that would attract FDI to the economy so as to accelerate industrialization,
and this initiative proved successful. The two primary objectives were, first, to ensure
foreign investment in various regions of the country, so as to boost infrastructural
development, and, second, to reap the reward from the advanced technologies that
accompanied such development. However, foreign enterprise would flow only into areas
in which prosperity was guaranteed. China had a vast market with a cheap, readily
available, and skilled labor force; affordable costs for land; and lucrative tax credits (Yuan,
Bi, & Moriguichi, 2006). In strategizing for the increased flow of FDI, the Chinese
government joined the World Trade Organization (WTO) in 2001 and promised to open its
economy entirely. The Chinese economy has now been ahead of its large international
competitors in FDI inflow for the past three decades. Its economy has produced tremendous
growth by means of FDI and manufacturing-technology inflow, and a new trend has
emerged since 1994 of foreign enterprises taking over the primary source of foreign
reserve.
China had accumulated $279 billion in FDI stock by 2010, and from 2000 to 2010
it recorded higher FDI inflows than any other large economy. As a litmus test for inflow
performance, both recent global economic crises failed to reduce this performance, whereas
other countries were adversely affected. In 2005 Chinese enterprises increased to $60.3
billion; in 2006 enterprises increased to $69.5 billion. By 2007 enterprises had increased

to $82.7 billion (Fung, Iizaka, & Tong, 2004). By breaking the monotony of economic
turmoil, China reached $105.7 billion, approximately 17.4% growth, in 2010. An
expansion of 11.3% was recorded in 2011, the inflow reaching $117.7 billion. However, a
decrease occurred in 2012, and the figures fell below the 2011 amount by 3.7%, dropping
to $113.3 billion.
The relationship between FDI inflow, GDP, and fixed investment is worth
examining. Various studies have shown that economic growth is taking place at a faster
rate than FDI inflow, forcing GDP to decrease by 2.3%, whereas gross fixed capital
formation (GFCF) decreased by 4.1%, after their respective 5.8% and 14.3% peak
recordings in 1994. This finding confirms marginal FDI contributions in Chinese capital
formation; the high rate of savings in the domestic economy took the credit for propelling
fixed investment plans after the new tenure of reforms (Fung et al., 2004).
Recent studies have given much attention to this subject, and there is now a
substantial body of literature on the relationship between FDI and China’s growth.
Interpretations of economic growth were previously within the context of neoclassical
economic models, which argue that the contribution of FDI related to such indirect effects
as enhancing the efficiency of the economy as well as to such direct effects as boosting the
amount of capital. However, studies have shown that FDI can also enhance economic
growth by contributing to externalities, such as technological diffusion. According to
Balogh, Liu, and Krstic (2001), such distributions are significant when FDI flows come
from a highly developed to a poorly developed economy.

Overview of the Development of FDI in China
Until 1978 China was an isolated economy that emphasized neither multinational
business operations nor permanent negotiations outside its local markets. China, as a selfproclaimed communist nation, was still relatively isolated and antiquated in much of its
thinking as a political body (Williams, 2006). However, after 1978, following the
introduction of the now-famous “open door” strategies of Deng Xiaoping, the Chinese
government began to make changes to some of its isolationist policies. The effect of these
policies initiated a new era of a more liberated Chinese economy and the subsequent
lessening o...