Foreign China FDI
There are numerous studies have tried to explain why foreign investors chose certain geographical area for their direct investments. This study has been focusing on Eastern China in order try to shed more light on what factors are of importance in the these areas. It has been argued, labour cost have a negative impact on FDI however this study finds that investors might be willing to accept a higher levels of wage if the education level is high in relation to what wage rates they are paying.
Regarding GDP, the future studies needs to be carried out in this area, this is due to the fact that one cannot tell if high GDP is a prerequisite for investments or an after following result of FDI. This gives doubts to theories arguing GDP has a major affect on FDI. By identifying the determinants of FDI in Eastern provinces, the aim is to give implications in how to predict future FDI inflow in Central and Western regions.
As mentioned earlier in this study, education level is likely to have a positive affect of FDI, counteracting when wage levels are increasing. Education level is one of the factors that are still very low in Central and Western provinces (see appendix figure 1.6 and 1.7). It will be appealing to follow the development of education and wage levels in order to predict the future possibilities on attracting higher levels of FDI.
Identifying the determinants of FDI in China is a broad and complex issue. The research has found that China's huge potential market size is the most significant factor for FDI inflow in China, which is in line with both theory and previous studies. China's large population, fast growing economy, coupled with membership of the World Trade Organization, are an unbeatable combination for foreign firms. Government incentive policies are another important reason; other key factors include labour costs, and high investment return. One of the new findings from the research is that global integration is one of the key factors for some foreign firms investing in China. This indicates that China is a very important market and investing in China is part of firms' global strategy. In conclusion, foreign firms do not simply come to China to take the advantage of any single location factor, but are more importantly driven by a whole myriad of often conflicting and competing reasons.
China's foreign trade has expanded at an even higher rate than its national economy. In 1978 China ranked 32nd in the world league table for foreign trade (MOFERT, 1995/96, p.19 quoted in Wei and Liu, 2001). In 1999, China's total foreign trade reached US$ 360.6 billion and this made China the ninth-largest trading country in the world. In 2000, this figure is expected to exceed US$ 400 billion. With rapid economic growth, this development trend of foreign trade is well set to be continued. As a result, FDI inflows which are found to be positively affected by trade will also expand.
The empirical results have important policy implications for economic development of individual provinces in China. The coastal areas have attracted a dominant proportion of FDI especially because of their long commercial and industrial traditions and graphical and ethnic links with Hong Kong, Macao and Taiwan. While the coastal areas are expected to absorb an increasing amount of FDI, the inland areas may exploit their advantage of relative lower labour costs and enhance other regional characteristics such as R&D manpower to attract more FDI. Since the Chinese government is in the process of providing national treatment for foreign investors, differences in investment incentives between the coastal and inland areas are likely to diminish.
The economic imbalances between Eastern and Western China remain a problem, a dilemma which is also apparent in the distribution of foreign investment. What are the reasons for this and how can this problem is solved? According to Hao Hongmei, although the investment in central and western China has grown since China has launched the Great Western Development strategy, there has been no significant rise in the proportion of FDI. In fact, the west has experienced a decline in the amount of FDI. Despite many preferential policies for central and western China, foreign investors still prefer eastern China. There are several reasons for this:
Firstly, investors want their investment to be profitable. One important factor they consider is whether the returns they are likely to get in central and western china will be as high as those they could get in the east. Secondly, western China does not have some of the industrial advantages of the east, and the eastern China has long favoured established foreign firms. Many scholars believe that encouraging more transnational companies to establish themselves in China should be an important part of the national economic strategy. Policy orientation speed up the rivalry between east and west China as they both try to attract more transnational companies. However, if a region's resource advantages are neglected for the sake of economic development and ‘catching-up' with other parts of the country, then development is condemned. The third reason might be the backward concepts of the people in the west. The western region also fails utilise its talented people and abundant natural resources due to lack of money. Reconsidering the current investment policy in the light of such a situation should be at the top of the Chinese government's agenda. We (Chinese people) must make sure that resources, industries and manpower in central and western regions are better utilised.
SHORTCOMINGS:
The most challenging aspect of this study was accessing reliable and consistent data. There are a number of data sources for foreign direct investments which include, World Bank, International Monetary Fund, African Development Bank, United Nations Conference for Trade and Development among others. However, in most instances, the figures reported by any one of the sources vary from the other sources. The inconsistency in data is mainly due to varying data collection, reporting and recording difficulties especially with private capital inflows, which are a major component of foreign direct investment under the liberalised investment systems. It is reported that many private organisations are not willing to volunteer information regarding their foreign business transactions. Therefore, the analysis in this study may not adequately and clearly reflect the behavioural patterns and interactions between foreign direct investments and gross domestic product.
While the existing studies help us in understanding the determinants and impact of FDI in China, several issues need to be taken into consideration in future research. Few theoretical models designed especially for the Chinese case have been constructed although a number of empirical studies with sound methodology have been undertaken. Another problem that has often been ignored or not properly dealt with in the empirical literature is the arbitrary choice of explanatory variables. Existing data limitations necessitate caution in analysing the results based on empirical estimations and studies at the disaggregated region and sector level are yet to be undertaken.
RECOMMENDATIONS AND FUTURE RESEARCH:
A World Bank report indicates that China lags behind India in several areas when it comes to attracting foreign direct investment: overall English level, software development, technology, services and social credibility. India's advantage over China lies in the country's strong awareness of IPR protection, private property protection and media supervision.
There are several factors Chinese people must be aware of in the next few years: firstly, foreign investors are increasingly interested in government credit, policy, property rights, law enforcement, technical standards and a humane environment. During the process of entry into the WTO, China needs to further improve its trade and FDI policy regimes. This will help China to attract more FDI. Secondly, Chinese people should not rely solely on government subsidies or preferential tax policies to secure foreign funds. Thirdly, skilled workers should be promoted to attract foreign funds. Finally, production and sale are still the major concerns of foreign firms as they value returns and profits above all.
On the other hand, Wei (2000) suggests that the corruption and red tape problems are important deterring factors that make China under-achiever as a host of FDI. These are very interesting aspects that worth further investigations.
There are many areas of research which relate to this topic and which are very useful to consider in China's FDI. This study only focuses on the key determinants and some regional determinants of FDI. Other major issues such as impacts, mode of entry, policy and trends, theory and application of FDI are the areas to research.
Another important point for the further research is that the research was based on quantitative data which by definition don not provide an in depth view of the respondents' attitudes. Qualitative research could expand on the findings and observations of that research.
This study is a cross sectional analysis and did not draw a complete picture of the determinant factor of the FDI strategy over time.
The findings from this study have an important implication for the future development of FDI in China. Rapid economic growth and foreign trade expansion are expected to continue, and labour costs are expected to remain competitive for the foreseeable future in China. Therefore, China should expect to continue experiencing a rapid increase in inward FDI.
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