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Why More is Actually Less: New Interpretations of China's Labor-Intensive FDI

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Author Info
Yasheng Huang ()
Abstract

The fact that China is the second largest recipient of FDI in the world has been heralded by economists and government officials alike as one of the crowning achievements of Chinese economy. This paper questions this perspective. The paper focuses on FDI from ethnically Chinese economies (ECEs), which has financed China's labor-intensive industries and its export growth. First, the paper shows that the conventional wisdom about why China attracts so much labor-intensive FDI is flawed. Second, the paper offers what might be called an institutional foundation argument to explain the phenomenon of China's labor-intensive FDI. Labor-intensive FDI, according to this argument, is fundamentally driven by a political pecking order of firms in China that systematically disadvantages indigenous private firms both financially and legally. Labor-intensive FDI rises to alleviate the liquidity constraints afflicting Chinese private firms as efficient private entrepreneurs have no choice but to cede their claims o in future cashflows to raise financing for their businesses.

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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 375.

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Date of creation: 01 May 2001
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Handle: RePEc:wdi:papers:2001-375

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Keywords: FDI; capitol market; transitional economies;

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  1. Yingyi Qian, 1996. "Enterprise reform in China: agency problems and political control," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(2), pages 427-447, October. [Downloadable!] (restricted)
  2. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law & Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  3. Stephen Young, Ping Lan, 1997. "Technology Transfer to China through Foreign Direct Investment," Regional Studies, Taylor and Francis Journals, vol. 31(7), pages 669-679, October. [Downloadable!] (restricted)
  4. Benjamin Gomes-Casseres, 1990. "Firm Ownership Preferences and Host Government Restrictions: An Integrated Approach," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 21(1), pages 1-22, March. [Downloadable!] (restricted)
  5. Kobrin, Stephen J., 1987. "Testing the bargaining hypothesis in the manufacturing sector in developing countries," International Organization, Cambridge University Press, vol. 41(04), pages 609-638, September. [Downloadable!]
  6. Barry Naughton, 1996. "China's Emergence and Prospects as a Trading Nation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-2), pages 273-344. [Downloadable!]
  7. Nathan Fagre & Louis T Wells, 1982. "Bargaining Power of Multinationals and Host Governments," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 13(2), pages 9-24, June. [Downloadable!] (restricted)
  8. Kobrin, Stephen J, 1987. "Testing the Bargaining Hypothesis in the Manufacturing Sector in Developing Countries," International Organization, MIT Press, vol. 41(4), pages 609-38, Autumn.
  9. Shang-Jin Wei, 1996. "Foreign Direct Investment in China: Sources and Consequences," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 77-105 National Bureau of Economic Research, Inc. [Downloadable!]
  10. Sachs, J.D. & Woo, W.T., 1994. "Structural Factors in the Economic Reforms of China, Eastern Europe and the Former Soviet Union," Papers 94-01, California Davis - Institute of Governmental Affairs.
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