Foreign Direct Investment in China.

Introduction

This paper is related to the services, public security, education, health, planning and selection of strategies and the selection made for this current paper is to present an overview of different aspects of the China growth and economy with that of Chinese government Foreign Direct Investment (FDI). This paper would represent a descriptive form of the relationship between the Foreign Direct Investment and China growth. Apart from that, the role of Foreign Direct Investment would be explained through which the Chinese government could maximize the advantages by making use of proper Foreign Direct Investment strategies and policies. Another discussion would also be carried out in which the aspects of liberalizing the Chinese Foreign Direct Investment policy would be highlighted. In the end, this paper would put conclusive limelight after discussing the role and interest of different foreign multinational multi-oriented companies for investing in the Chinese region for trade, business and several different purposes.

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Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is the main topic to be covered in this research paper so before proceeding ahead, we would discuss and understand what Foreign Direct Investment basically is and how is it relevant to the governing bodies and provides financial competitive advantage to the local and multinational organizations. Foreign Direct Investment can be defined as the long-term investment made in any form which could earn interest and attention of the organizations who work and function beyond their local domestic territory or economy of the investors. In other words, Foreign Direct Investment could be understand as an enterprise of a particular country making physical mode of long-term investment in order to manufacture a factory or company in another country (Enright, 2008).

The Foreign Direct Investment relationship can be seen as of a basic parent enterprise which gets associated with other foreign subsidiary to give a new name and form to the company as multinational company. But for that, the parent company needs to have at least 10% of shares of the foreign affiliated company so that it could be regarded as the Foreign Direct Investment. The factors which are involved with that of the Foreign Direct Investment and help the Foreign Direct Investment to grow in different aspects are:

  • Operational flexibility
  • Economic growth
  • Liberal investment rules
  • De-regulation

Types of Foreign Direct Investment

There are two different kinds of Foreign Direct Investment which are explained in the following:

  1. Outward Foreign Direct Investment: This type of Foreign Direct Investment is supported by the local government of the country and the government set aside all the risks involved in this type of investment. The reason for supporting this Foreign Direct Investment is that it is tax incentives based investment which some degree of discouragement for the investing bodes on the other side.
  2. Inward Foreign Direct Investment: This kind of Foreign Direct Investment is supported by several economic factors. The reason behind the succession of the Inward Foreign Direct Investment is demolishes the limitations and restrictions faced by the investing bodies. It also provides them with interest loans, grants, subsidies and tax breaks.

Advantages of Foreign Direct Investment

There are numerous advantages and benefits attached to the Foreign Direct Investment from which some are listed as under (Huang, 2003, p46):

  • Foreign Direct Investment facilitates in the economic growth and prosperity of the particular country where other companies are investing.
  • Foreign Direct Investment has also helped several countries to survive successfully with sustainable economic development at the time when those particular countries were going through the phase of destitutions and hardships.
  • Foreign Direct Investment allows the transfer of modern technologies and infrastructures from one country to another.
  • Foreign Direct Investment permits and promotes the competition among the present local input market of a particular country.
  • Foreign Direct Investment also introduces the chances of getting new job vacancies because of the enhancement of the multinational companies.
  • Foreign Direct Investment helps in increasing the graph of income for people and companies which is generated through the revenues and taxation policies.
  • Foreign Direct Investment also makes it easier for the interested business communities and governing bodies to borrow or lease financial aid at lesser interest rates.

Role of Foreign Direct Investment in Economic Development of a Country

(Huang, 2003, p45) Foreign Direct Investment plays a very important and vital role in establishing sustainable development in the economy of the host country. With the passage of time, Foreign Direct Investment has helped the host countries to enhance their mode of working environment of the corporate business world and to improve their stability with great achievements. The world has witnessed the enormous development of Foreign Direct Investment since the last 20 years. It flourishes the state of economic conditions of the host countries with huge flow of technical knowledge, capital knowledge and advancements in the corporate affairs.

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Foreign Direct Investment is a form to renew the relationship status of countries and corporate worlds because it allows different foreign companies to come and invest their money to other homelands which brings capital growth and economic development for not only the host country but also for the investing company and its country. It not only helps in improving the infrastructural conditions, but also helps in improving the living standard of the individuals and people living in both the countries.

Foreign Direct Investment also helps the under-developing countries to invite other foreign companies to their homelands and provide facilities and chances to those foreign companies to invest in their homelands. In this way, the particular country could build its own research and development departments or fields which could later contribute in the economic and technical development of the country eventually.

Economic Growth Condition of China

(Enright, 2008) China is one country which has the record of possessing the largest population in the world. Over the years, China has flourished and maintained its dignity as compared to other civilizations with its ancient civilization and unique simplified traditions.

Previously, China went through a bad economic stage where its economy and corporate conditions were badly affected. But, with the advent of the renovation of the China Reforms in 1970s, the economy of China has regained with good reputation and standard. Within last 30 years, China has flourished on the map of the world as one of the most advanced and diversified countries present on the globe. The economy of China has encouragingly improved rapidly and miraculously with an average rate of 8% in the final Gross Domestic Product (GDP) per year of the country. In this way, the economy of China has improved to 10 times as compared to what it was in the past 30 years back. According to an estimated calculation, the GDP recorded in the year 2007 reached up to 3.42 trillion US dollars which is a remarkable progress for the people, companies, investing bodies and governing bodies involved. By coming to this point, China has become second top country after the United States which has the great Purchasing Power Parity GDP.

(long, 2008) To flourish and develop more with flying colors, the government provided independence and freedom to business communities so that they could work without any fear and could survive among other competitors in the global marketplace. The government also facilitated companies and business communities with authority to make their own decisions and do beneficial work as much as possible. This paved way for the companies to move ahead and prove their existence over other enterprises while giving them competitive edge and giving good reputation to their homeland. Several local and multinational companies set up their operations in the services and manufacturing sector and made huge amount of revenue generation on annual basis with authority.

The government of China adopted the China Reforms in 1970s with slow but steady pace which opened the gates of investment in the homeland for the foreign investors. This has also helped the Chinese government in the economic development of the country. The sectors beyond the control of the state government of China developed and improved at an enormous growth rate all because of the China Reforms of 1970s. However, not everyone living in China enjoys the bounties of the increased income and revenue growth because the income distribution and working conditions are not equal for everyone. If one person earns huge amount of income, some other person might not earn very much but could earn a very low level of income monthly.

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Relationship of Foreign Direct Investment with China Economy

China has gone through many stages of development and Foreign Direct Investment is one of the developments China has made along with time. The investment market for the foreign investors was open with wide variety of business gradually as the homeland of China has vital attracting points for the investors which include enormous huge domestic market consisting more than 1.2 billion customers with very cost effective labor market.

The record of Foreign Direct Investment in the history of China was not so appreciable till the 1980s when the level of Foreign Direct Investment increased from the zero level to the level of multi million US dollars annually within some years as recorded by the mid 1980s. It is because foreign companies and foreigners were not allowed to have export-oriented joint ventures with the local companies before the early 1980s. the growth of the Foreign Direct Investment and foreign investors slowed down in the late 1980 and then manufacturing of goods for sale in the local Chinese market was allowed in the early 1990s, which paved ways for the establishment of entirely foreign-owned or foreign-oriented organization by the mid of 1990s. The inward Foreign Direct Investment recorded for the year 1996 was calculated to be more than 40 billion US dollars. The World Trade Organization (WTO) owned by the United Nations (UN) also played an important role and forced the government to establish separate services sectors for the investing parties and bodies. After the year 1996, various sources of Foreign Direct Investment (FDI) in China branched out with tremendous size of shares from the United States, Europe and Japan.

As calculated by the end of the year 2003, the major sources of Foreign Direct Investment investing in China were recorded to be Hong Kong (inward Foreign Direct Investment making up to 33% share), Japan (with 9% share), the Virgin Islands (around 11% of share) and South Korea (with 8% share). By the time the year of 2004 ended up, China became among the top eight host countries who receive huge amount of Foreign Direct Investment from various other investing countries. This made China among one of the fastest growing economies in the world with attractive amount of Foreign Direct Investment consisting of more than 60.6 billion US dollars which was up to 13% of the previous year.

Foreign Direct

Apart from all the benefits and advancements made into the Foreign Direct Investment of China, it is a fact that the ratio of Foreign Direct Investment never stood consistent or uniformed in China forever. It was about zero level in the early 1980s and then got risen up in the mid-1980s, which again faced downfall in the early 1990s and then encountered tremendous increase since the year 1996. According to an estimated calculation, the Foreign Direct Investment of China faced slight downfall in the early five months in the years 2005 and 2006 but the up and down fluctuation was considered to be reasonable without any tensed downfall. The investors interested in investing in the Chinese market looked for the coastal areas of China for trade and for the ease of transportation. They managed to grab the right of entry to imported inputs and to export markets, with enhanced infrastructure and technology by making use of the talented and well educated labor force. The advent of the new technological infrastructure gave encouraging output to the modern cities, but its pace of work was evaluated to be slow in the interior and lower rural and suburb areas.

China received Foreign Direct Investment from several countries and improved it working conditions in the fields of textiles, antiques, autos, finished goods, footwear, garments, real estate, light and heavy industry, services and several other different kinds of industries in which China has improved its labor taskforce and is getting Foreign Direct Investment in almost all kind of industries.

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Importance and Role of Foreign Direct Investment in China

Although the state of China’s Foreign Direct Investment are still considered to be in the primitive stage of development as China is among one of the developing countries present around the globe, the role played by the Foreign Direct Investment for China is taken very seriously and very crucially because it is very important for the economy and development of China. Foreign Direct Investment has helped China to come in front and to prove its identity over other countries while giving them a competitive edge. This development position and standing of China is gathered with a lot of hard work and sustainable development. For this, the people of China, companies and governing bodies of China have laid great stress on how to take their homeland with dignity and pride; and how to grab the attention of the foreign investing companies.

Foreign Direct Investment has helped China to expand its economy with sustainable development while inviting other foreign companies to come and invest in China. For this, Chinese government has extended authorities and freedom power to the companies to get along with other multinationals in shape of joint ventures and to come along as in shape of new multinational organizations. Foreign Direct Investment has actually helped China to develop and save its economy at the time when the Chinese government was facing immense pressure and downfall in the Chinese economy. Foreign Direct Investment has the honor to save the economy of China while helping it to develop its economy, business world and corporate strategies.

With the help of Foreign Direct Investment, China has also flourished with respect to modern technologies and new organizational infrastructures. New multinational companies have launched their subsidiaries and branches in China with the help of the governing bodies and local companies.

Not only this, but Foreign Direct Investment has improved the working conditions in China by facilitating the human capital resources by providing the workforce with onsite trainings and incentives. In this way, new job vacancies were introduced in the entire region which paved way for both the working community and the managing community as owners of the business. So it can be concluded that Foreign Direct Investment not only helps in developing the economy of the country, but also improves the lifestyles of the working community and taskforce.

Foreign Direct Investment has also helped in increasing and raising the income level of the people and individuals. It has increase the level of productivity of the entire county with sustainable economic development.

Has Chinese Government Maximized the Benefits of its Foreign Direct Investment Policy?

Foreign Direct Investment has been one of the most important discussed topics in the economies of the developing countries. It helps countries in improving their economic and social conditions by maintaining good reputation with the help of the foreign investing companies and parties. Now, to answer this question whether the Chinese government has maximized the benefits of its Foreign Direct Investment Policy, we would have to discuss the Foreign Direct Investment policies and China’s progress first.

Since the last 25 years, the government of China as developed a complete range of rules and regulations for the Foreign Direct Investment policies. According to these policies, China has always favored the foreign investment in its region because it is always beneficial and helps in the economic development of the country. For this purpose, China has set different policies for different areas and locations of the country so that special economic places or normal economic places could get efforts made to that piece of land accordingly.

China supports and persuades the Foreign Direct Investment policies for the intention of following points:

  • To produce energy resources, transportation, raw material and other kinds of basic industries.
  • To transform the traditional way of agriculture with that of modern agriculture techniques, while promoting the industrialization of agriculture.
  • To support foreign businesses in order to transform the traditional industries (for example; textile, machinery, goods manufacturing industries) and to upgrade their way of working.
  • To use raw and renewable materials while protecting the environmental conditions, and modernizing the public utilities.
  • To support and encourage the export oriented Foreign Direct Investment polices and projects.
  • To manufacture more industries in the western areas of China.

China has modified its Foreign Direct Investment policies to make them more flexible after becoming a permanent member of the World Trade Organization (WTO) for the foreign investing parties. Strict laws have been removed for the benefit and convenience of the investing companies. To increase the level of exports, China has incorporated compulsory, neutral and voluntary Foreign Direct Investment policies. The Foreign Direct Investment policies of China have prominently improved the export level of the entire country and made it export-oriented as a whole. According to the Foreign Direct Investment policy of China, the main emphasis is to promote the technological aspects within the country while attracting the foreign investment from other countries as much as possible. In this way, the government of China has consequently maximized the benefits of the Foreign Direct Investment policy.

Should Chinese Government Continue to Liberalize its Foreign Direct Investment?

A desirable and more reasonable explanation or reason for the rapid increase in terms of the Foreign Direct Investment or capital formation ratio in the entire decade of 1990s was due to the policy decisions made by the government. In the year 1992, the Chinese government decided to finally liberalize its Foreign Direct Investment policy. For this purpose, the government went through an overview of all the Foreign Direct Investment policies and made certain significant changes in the policy according to which all the sectoral and regional restrictions present in the policy were removed. This helped the Chinese government a lot in every aspect especially in increasing the chances of market access while strengthening the intellectual property rights protection for the investing bodies present in the marketplace (Huang, 2003, p46).

The Foreign Direct Investment liberalization hypothesis is usually used to describe the flow and direction of changes taking place in the relative level of Foreign Direct Investment. The vibrant change in the Foreign Direct Investment regime also suggests that Foreign Direct Investment could not be the only reason at work. It is because even before the liberalization of 1992, china was very much dependent on the Foreign Direct Investment as evaluated by the Foreign Direct Investment/nonstate fixed asset ratio. In fact, the affect of the 1992 liberalization in China was considered to be more huge, rather being immediate for the individuals and companies involved.

(Huang, 2003, p45) The Foreign Direct Investment liberalization does not give rise to the structural forces involved in the system of the Chinese economy. To understand the reason lying behind this theory, one needs to go ahead of the Foreign Direct Investment liberalization to know better the underlying structural forces involved. The reason that the economy of a country is open for Foreign Direct Investment does not mean that it would swamp or would be flooded with the Foreign Direct Investment. A liberalized Foreign Direct Investment allows the inflow of the direct investment made by the foreign companies to come directly without facing any hurdle in between. But the actual materialization of Foreign Direct Investment actually is dependent on many other factors involved. During the period of 1996-2000, China depended more on the Foreign Direct Investment than some countries with more liberal Foreign Direct Investment. Now it does not means that the Foreign Direct Investment liberalization does not matter at all, but in fact the Foreign Direct Investment liberalization is just not the only determinant of Foreign Direct Investment in real practical life.

(Huang, 2003, p47) Previously, China went through a bad time with respect to foreign investment and was a tightly closed isolated country with respect to foreign investment from the global marketplace. But later, the advent of Foreign Direct Investment in the region paved ways for the new development era for the country and gave rise to the multinational companies’ intrusion with wide open gates from the Chinese government. The liberalized market-oriented policies made by the Chinese government opened their domestic markets for the outer foreign investors.

After discussing all the aspects involved with respect to the Foreign Direct Investment liberalization of the Chinese government, I would conclude my analyses of this topic that although the market of Chinese Foreign Direct Investment is liberal enough to attract numerous foreign investors, but there are still some deadlocks which are needed to be open by the Chinese government through liberalizing the Foreign Direct Investment policies a bit more for the foreign investors. The Chinese government is seeking help from the foreign investing companies to restructure and modernize the financial system of the country, and for this purpose the country would have to undergo through Foreign Direct Investment liberalization.

Chinese Investment Environment as Seen by the Foreign Investors

As discussed previously, China h some along to this point of development after a very tough period of remaining isolated from the other global market of investment. Now, the Chinese government has opened gates for all the foreign investors to come and invest in their homeland and for that, they are getting more encouraging feedback and response as they think they would get by doing so. China has become one of the most significant countries of the world with highest rank of foreign investment in its homeland made by several huge multinational organizations. China is considered to be the golden gate of opportunity to earn money for every multinational company and thus, the economy of the country is improving vise versa with the passage of time. China has caught the attention of several investing parties very easily and is paying them back with huge amount of foreign exchange from the investments they have made. The China Reforms of the 1970s have paved way for all the foreign investors and have given them authority to come and experiment according to their experience in the Chinese marketplace.

One reason for being apple of the eye of every investor is that China holds he largest population of the consumers in the entire world (with a population of around 1.3 billion people) and has huge variety for the investing parties. China is said to have the 6th largest economy in the world. Several organizations around the globe, especially the large multinational companies are investing in queue in China where local consumption is rapidly increasing. It is estimated that 400 multinational companies from the total 500 multinational companies present in the world have already invested in China.

Apart from all the advantages involved in Foreign Direct Investment in China, there are certain challenges or hurdles which are faced by the foreign investors. These challenges are at times of the cultural differences, language problem, complex channel distribution systems and at times, the sudden changes made by the governing bodies for the foreign investors as well. the investment market of China is not homogeneous and comprises of extremely diversified economy and cultures. Nonetheless, the legal system of the Foreign Direct Investment in china is highly complex in nature due to rigidness in the regulatory system. Foreign investing companies should also ensure that they have a strong bounding contract which has no loose ends in order to avoid any future mismanagement or trouble from the local workforce or local companies.

At the end, we would conclude our research paper with the statement that investing in China is no doubt very profitable, but the foreign investors need to understand some points before investing in the Chinese markets, and this important point is of relationship. It is because relationship is considered to be very important in China and these Chinese virtues could be gained with the help of goof behavior, patience, sincerity for business and goodwill.

Conclusion

China introduced Foreign Direct Investment for more than 20 years and since then, China is enjoying the foreign attraction and investment from numerous multinational organizations. China has progressively attracted quite a lot of foreign investing parties to its homeland while modifying its Foreign Direct Investment policies according to the interest and convenience of the investing parties. Since the year 1993, China has successfully attracted the largest amount of Foreign Direct Investment as compared to all developing countries while improving its technical development as well as export ventures.

References

Basu, P., Chakraborty, C., and Reagle, D. (2003). Liberalization, FDI, and Growth in Developing Countries: A Panel Cointegration Approach. Economic Inquiry, 41, 510-516.

Puah, Chin-Hong, Kueh, Jerome Swee-Hui and Lau, Evan; 2008, The Implications of Emergence of China Towards Asean-5: Fdi-GDP Perspective, MPRA. Web.

Guoqiang long, 2008, China’s Policies on FDI: Review and Evaluation, Web.

Yasheng Huang, 2003, Selling China: Foreign Direct Investment During the Reform Era, Cambridge University Press, p44-47.

Michael J. Enright, 2008, Foreign Direct investment in China, Asia Case Research Centre.

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