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Foreign Direct Investment in China: Effects on Growth and Economic Performance

  • Edward M. Graham

    ()

    (Institute for International Economics)

  • Erika Wada

    (Institute for International Economics)

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    By almost all accounts, foreign direct investment (FDI) in China has been one of the major success stories of the past 10 years. Starting from a base of less than $19 billion in 1990, the stock of FDI in China rose to over $300 billion at the end of 1999. Ranked by the stock of inward FDI, China thus has become the leader among all developing nations and second among the APEC nations (only the United States holds a larger stock of inward FDI). China's FDI consists largely of greenfield investment, while inward FDI in the United States by contrast has been generated more by takeover of existing enterprises than by new establishment, a point developed later in this paper. The majority of FDI in China has originated from elsewhere in developing Asia (i.e., not including Japan). Hong Kong, now a largely self-governing "special autonomous region" of China itself, has been the largest source of record. The dominance of Hong Kong, however, is somewhat illusory in that much FDI nominally from Hong Kong in reality is from elsewhere. Some of what is listed as Hong Kong-source FDI in China is, in fact, investment by domestic Chinese that is "round-tripped" through Hong Kong (see footnote 2). Other FDI in China listed as Hong Kong in origin is in reality from various western nations and Taiwan that is placed into China via Hong Kong intermediaries. Alas, no published records exist to indicate exactly how much FDI in China that is nominally from Hong Kong is in fact attributable to other nations. According to official sources, in the period 1992-96, FDI from developing Asian nations dominated total FDI flows into China, but since 1996 a growing portion of these flows has come from other sources (i.e., Europe, North America, and Japan). This latter FDI generally has been of a different character than FDI from developing Asian nations. While the latter has been concentrated in export-processing activities in sectors in which China has revealed comparative advantage, much of the former has been directed more toward the domestic market in sectors in which China has no revealed comparative advantage. Thus one consequence of a rising percentage of FDI from Japan, Europe, and North America has been that overall the activities of foreign-invested enterprises in China have become somewhat more focused on the domestic market, and less on export markets, in the late 1990s relative to the mid-1990s. The consequences are discussed in more detail later in this paper. This includes an econometric test of whether FDI in China has contributed to increased total factor productivity growth in those provinces that have received large amounts of FDI. The tests suggest that the result is positive, and hence that FDI has contributed significantly to economic growth in China beyond that which results from faster capital accumulation.

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    Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP01-3.

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    Date of creation: Apr 2001
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    Handle: RePEc:iie:wpaper:wp01-3
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    1. Daniel H. Rosen, 1999. "Behind the Open Door: Foreign Enterprises in the Chinese Marketplace," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 23, December.
    2. 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.
    3. Françoise Lemoine, 2000. "FDI and the Opening Up of China's Economy," Working Papers 2000-11, CEPII research center.
    4. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
    5. Edward M. Graham & Paul Krugman, 1995. "Foreign Direct Investment in the United States, 3rd Edition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 52, December.
    6. Takatoshi Ito & Anne O. Krueger, 1996. "Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5," NBER Books, National Bureau of Economic Research, Inc, number ito_96-1, August.
    7. Gary Clyde Hufbauer & Jeffrey J. Schott, 1992. "North American Free Trade: Issues and Recommendations," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 71, December.
    8. Theodore H. Moran, 1998. "Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 53, December.
    9. Shang-Jin Wei, 1993. "Open Door Policy and China's Rapid Growth: Evidence from City-level Data," NBER Working Papers 4602, National Bureau of Economic Research, Inc.
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