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

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  • Yasheng Huang

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    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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    File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp375.pdf
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    Bibliographic Info

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

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

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    Keywords: FDI; capitol market; transitional economies;

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    1. Kobrin, Stephen J., 1987. "Testing the bargaining hypothesis in the manufacturing sector in developing countries," International Organization, Cambridge University Press, Cambridge University Press, vol. 41(04), pages 609-638, September.
    2. Xiaonian Xu & Yan Wang, 1997. "Ownership structure, corporate governance, and corporate performance : the case of Chinese stock companies," Policy Research Working Paper Series 1794, The World Bank.
    3. Benjamin Gomes-Casseres, 1990. "Firm Ownership Preferences and Host Government Restrictions: An Integrated Approach," Journal of International Business Studies, Palgrave Macmillan, vol. 21(1), pages 1-22, March.
    4. Shang-Jin Wei, 1996. "Foreign Direct Investment in China: Sources and Consequences," NBER Chapters, National Bureau of Economic Research, Inc, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 77-105 National Bureau of Economic Research, Inc.
    5. Stephen Young & Ping Lan, 1997. "Technology Transfer to China through Foreign Direct Investment," Regional Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 31(7), pages 669-679.
    6. Yingyi Qian, 1996. "Enterprise reform in China: agency problems and political control," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 4(2), pages 427-447, October.
    7. Sachs, J.D. & Woo, W.T., 1994. "Structural Factors in the Economic Reforms of China, Eastern Europe and the Former Soviet Union," Papers, California Davis - Institute of Governmental Affairs 94-01, California Davis - Institute of Governmental Affairs.
    8. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 21(2), pages 297-326, October.
    9. 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(2), pages 273-344.
    10. Nathan Fagre & Louis T Wells, 1982. "Bargaining Power of Multinationals and Host Governments," Journal of International Business Studies, Palgrave Macmillan, vol. 13(2), pages 9-24, June.
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