Contributions of FIEs to China’s Economy Using an Input-Output Model Capturing Processing Trade with Ownership Distinction

Since China’s opening policy, low-cost labor force in China, preferential policies and China’s huge potential market are major drivers pushing foreign direct investment (FDI) flowing into China. FDI has greatly promoted China’s economic growth in the past three decades. Since 1993, China has become the second largest recipients of FDI in the world. Most of the inward FDI in China are used to set up foreign invested enterprises (FIEs), data from China’s Ministry of Commerce show that there has been more than 740 thousands FIEs established in China by April 2012. FIEs have become an important component of the Chinese economy. To shed light on the different roles of foreign invested enterprises (FIEs) and domestic-owned enterprises (DOEs) in China’s economy, in this paper we proposes a non-competitive input-output model with distinction of FIEs and DOEs capturing processing trade in China’s economy. The model divides China’s economy into six parts in order to capture the differences in production technology & structure between DOEs and FIEs, as well as between processing exports and non-processing exports. Based on the above model, we compile the special input-output table of China for 2007, conduct empirical analysis of the contribution by DOEs & FIEs to China’s economy and make a rough estimate of the contribution of EU FDI into China.