论文总字数：82856字

东南大学

毕业设计（论文）报告

外商直接投资对中国经济增长的影响 - 国外出口和投资

Effects of Foreign Direct Investment on China's Economic

Growth - Foreign Export and Investment

经济管理学院 经济学专业

学号____14612128_______

学生姓名___海雅思______

指导老师____浦正宁____

起讫日期___2016年3月至2016年6月

设计地点____经管楼__

Abstract

This paper theoretically and empirically studies the effects (positive and negative) of Foreign Direct Investment on China’s economic growth from the period 1995-2014. Theoretically, the paper outlines the historical overview of the development of FDI in China, and analyses the major types of FDI and their determinants. Source of FDI in China are identified and discussed by their source countries with regional distribution and sectoral distribution taken into perspective and studied.

The Expenditure Approach is used to study the effects of foreign direct investment in China in this study. Considerations and analysis are given to foreign demand in terms of foreign export and investment as they contribute much to China’s economic growth. Foreign export and investment variables are given measuring models to be measured against China’s national GDP growth to estimate their contributions and effects on GDP growth. Domestic demand is also computed and estimated and compared against foreign demand to analyze their contributions and impacts on China’s GDP growth. Conclusions and proposed recommendations are given by the author according to the outcome of this research.

本文概述了外商直接投资在中国发展的历史概况，分析了外商直接投资的主要类型及其影响因素，讨论了中国外国直接投资的来源国以及外国直接投资的区域分布和行业分布。根据1995-2014年间的数据，本文使用支出法研究了外商直接投资对中国经济增长的正面和负面影响，主要研究了国外出口和国外投资（国外需求）。计算出了外国出口和投资变量，估算了它们对中国国内生产总值增长的贡献和影响。另外，本文估算并比较分析了国内需求和外国需求对中国国内生产总值和经济增长的贡献和影响。根据研究的结果，给出了结论和建议。

Key words: Economic Growth, Foreign Direct Investment, China, Export, Gross Domestic Product, Foreign Demand, Domestic Demand

TABLE OF CONTENTS

Chapter 1 Introduction 4

Introduction 4

Chapter 2 Development of Foreign Direct Investment in China

• 1. The Growth of Foreign Direct Investment in China 5

Initial Period of Foreign Direct Investment (1978 – 1983) 5

1. Progressive Period of Foreign Direct Investment (1984 – 1991) 5
2. Climax Period of Foreign Direct Investment (1992-2000) 6

China’s Entry into World Trade Organization (2001 – 2005) 7

• 1. Forms of Foreign Direct Investments 8

1. Equity Joint Ventures (EJVs) 8
2. Contractual Joint Ventures (CJVs) 9
3. Wholly Foreign-Owned Enterprise (WFOE) 10
4. Joint Exploration 11
5. Share Company with Foreign Investment (SCFI) 11
   1. Determinants of Foreign Direct Investment 11
      1. Market Size 11
      2. Market Growth 12
      3. Cost of Labour 12
      4. Openness to Trade and Access to International Markets 13
      5. Infrastructure- Physical and Technological 14
      6. Promotion and Protection of Foreign Direct Investment 15

2.3.7 Policy Coherence and Regulatory Framework 15

Chapter 3 Source and Distribution of Foreign Direct Investment in China 16

• 1. Sources of Foreign Direct Investment 16
  2. Distribution of Foreign Direct Investment 17
     1. Regional Distribution of Foreign Direct Investment 17

3.2.2 Industrial Sector Distribution of Foreign Direct Investment 18

Chapter 4 Empirical Analysis 20

• 1. Methodology 20
  2. Empirical Model 20

4.3 Data Analysis and Results 22

Chapter 5 Concluding Remarks amp; Recommendations 27

References 28

Appendices 29

Chapter 1

Introduction

Foreign Direct Investment is a short-term or long-term investment made in another country or region by individuals, governments and businesses with agreements to share certain proportion of the investment between the investor (s) with the host person or country.

Over the last 30 years, FDI in China stood out to be indisputably the great successful achievement. In 1979, with reform and open-door policies led by Deng Xiaoping, China was opened to the global market. Through this reform and open door policies, China became a potential market-oriented economy and generated strong economic growth in all sectors of the economy. The positive outcome of China’s reform and opening-door policies can be seen by many development activities and changes.

Obviously, FDI plays a significant role in the development the Chinese economy and brings about tremendous amount of positive changes (effects). However, FDI also brings negative effects on the Chinese economy. Vast literatures and empirical studies have been written and carried out to study the negative effects of FDI, and it has been proven that FDI also affect the development of China negatively.

This paper theoretically and empirically studies the effects (positive and negative) of FDI on China’s economic growth from the period 1995-2014. The paper firstly outlines the historical overview of the development of FDI and FDI open-door policies in China, and then proceeds on to identify and analyze major types FDIs and their major determinants. Source of FDIs in China are identified and discussed by their source countries. Regional distribution and sectoral distribution of inward FDI in China are further studied and analyzed

This paper uses the Expenditure Approach to study the effects of foreign direct investment in China. Considerations and analysis are given to foreign demand in terms of foreign export and investment as they contribute much to China’s economic growth. Foreign export and investment variables are given measuring models to be measured against China’s national GDP growth to estimate their contributions and effects on GDP growth. Domestic demand is also computed and estimated and compared against foreign demand to analyze their contributions and impacts on China’s GDP growth. Conclusions and proposed recommendations are given by the author according to the outcome of this research.

Chapter 2

Development of Foreign Direct Investment in China

2.1 The Growth of Foreign Direct Investment

Foreign direct investment inflow in China started back in the 1950s with Russia as the only major source. However, under Deng Xiaoping, China took a completely different approach with FDI in December 1978 when promulgating the reform and open-door policies. Since then, FDI inflow in China gradually increases as China began to open up itself to the rest of the world. As of 1979, China became an economy in which FDI became more attractive. The Chinese economy began to experience rapid economic and social changes. The development FDI in China can be divided into the following periods:

Initial Period of Foreign Direct Investment (1978 – 1983)

In 1978, China officially opened its market to the world when formally formulating the Equity Joint Venture Law (Sino Foreign Ventures). The law provided a legal framework for potential foreign investors and potential local Chinese investors to form equity joint ventures. The legal framework of the law stated that foreign investors are allowed to come into joint ventures with local Chinese firms, business or any economic entities to invest in China. More regulations and laws on foreign exchange, taxation, registration and labour management were also formulated. To manage FDI and foreign trade, Guangdong and Fujian Provinces were given autonomy in 1979. The Chinese government then established four Special Economic Zones (SEZs) in Guangdong and Fujian Provinces in August 1980. The local government authorities in the Special Economic Zones play important roles with separate independent powers in planning and implementing development plans, issuing licenses, issuing land permits, approving projects and coordinating banking, taxation and customs.

The Special Economic Zones were established in the southeast coastal regions with the intention of attracting foreign investments from Hong Kong, Taiwan and Macau. The core objectives of the establishment of the Special Economic Zones were: (1) To develop the coastal area of China (2) to attract more foreign investments, (3) To make China as the window to the outside world, (4) To attract foreign capital and advanced technology, (5) To promote and increase export, create employment, and generate foreign income, (6) To serve as ‘policy laboratories’, where policies can be tested and if successful, could then be implemented elsewhere in China and (7) To link and enhance cooperation between Hong Kong, Macao and Taiwan with mainland China.( McKenney, 1993).

ii) Progressive Period of Foreign Direct Investment (1984 – 1991)

In 1984, the Chinese government declared that China’s economic would be reformed into “socialist market economy” by assigning greater role to the domestic market economy. (People’s Daily – 21^st October,1984). As FDI became increasingly attractive and successful in the SEZs, the Chinese government declared other parts of the country as well for foreign investment and trade. Fourteen coastal cities were declared for foreign investment and trade. The cities were Wenzhou, Dalian, Zhanjiang, Qinhuangdao, Guangzhou, Nantong, Ningbo, Tianjin, Beihai, Yantai, Lianyungang, Qingdao, Shanghai and Fuzhou. The local government authorities of these cities also have the same privileges of having the autonomous or independent power in planning the legal framework and regulations for foreign investments and trade. These cities eventually established their own Economic and Technological Development Zones (ETDZs) and various incentives were promoted to encourage foreign investments.

Hong Kong, Taiwan and Macau were the largest FDI investors in China with investment projects mostly directed toward manufacturing, hotel and restaurant developments. However, despite these huge portions of investments, the overall performance of FDI was low and did not meet the objectives of the reform (Zhang 1999). The factors behind this low performance were:

• Foreign investors’ legal environment was not well developed.
• Lack of communication , transport and infrastructure development
• Shortage of skilled labour force

The new laws and regulations in this period of FDI in China are as listed below:

• Wholly Owned Subsidiaries (WOS) Law (1986)
• Provision for the FDI Encouragement (1986)
• Constitutional Status of Foreign invested Enterprises in Chinese Civil Law (1986)
• Adoption of Interim provision on guiding FDI (1987)
• Delegation on approval of selected FDI projects to more local governments (1988)
• Laws of cooperative joint ventures (1988)
• Revision of equity joint venture law (1990)
• Rules for implementation of WOS law (1990)
• Income tax law and its rules for implementation (1991)

Profits and interests of foreign investors in China are protected by the Law of People’s Republic of China on Wholly Foreign-Owned Enterprises (WFOEs) as established on April 12, 1986. Further law and regulation restrictions were relaxed for FDI promotion with measures for land use, enterprise autonomy, labour recruitment and profit remittances, labor recruitment.

Hainan was declared as China’s separate province, the second largest island and the biggest Special Economic Zone in 1987. Eventually, more parts of China, including the Liaoning and Shandong peninsulas, the Yangtze River Delta surrounding Shanghai and the Southern Fujian Triangle and the Pearl River Delta surrounding Guangzhou were designated to foreign investment and trade. These areas received the same preferential treatment as in SEZs and fourteen open coastal cities.

Laws and regulations regarding Joint Ventures between foreign investors and local Chinese investors were established by the Chinese government in 1990 with the aim to encourage joint ventures to have advanced technology in order to save energy and raw materials.

iii) Climax Period of Foreign Direct Investment (1992 – 2000)

1992 was the year in which FDI in China grew remarkably high. In September of 1992, the strategy of “Socialist Market Economy” was announced by the Chinese government to be adopted to improve the economic framework for standard market operations. In 1992 and 1993, several laws and regulations related to market operations were passed, which were as follows:

• Trade Union Law (1992)
• Company Law (1993)
• Regulations of value-added tax, consumption tax, business tax and enterprise income tax (1993)

The Chinese government put great work in encouraging export-oriented foreign funded enterprises (FFEs) with advance technologies by implementing new frameworks and further opening up the economy. New investment areas such as banking consultancy, retailing, wholesaling accounting and information and insurance were also opened for foreign investors. Also, governmental procedures for FDI administration and management were further simplified.

In this period, Shanghai became the economic center of China. According to the Financial Times Survey, April 24, 1991, The Chinese government planned to carry out the experiment of new policies and practices in Shanghai and the rest of China. Therefore, the government decided to develop Shanghai into an international hub for finance and trade.

From 1994 to 2000, the growth rate of FDI in China dropped down to a relatively stable level. In 1995, the Chinese government issued the “Provisional Guidelines for Foreign Investment Projects” and started guiding FDI to achieve objectives set for economic development. Different Industries were given different preferential treatments. The Provisional Guidelines for Foreign Investment categorized all FDI projects into four categories:

1. Encouraged projects

This category consists of projects in under-develop industries such as agriculture and infrastructure that needs expertise, foreign capital and advanced technology from foreign investors to meet market demand.

1. Restricted projects

These projects are projects that are engaged in the exploration of valuable resources with their production exceeding domestic demand.

1. Prohibited projects

These categories of projects are that impose threats to national security, public interests or environment.

1. Permitted projects

These are other permitted foreign investment projects

iv) China’s Entry into the World Trade Organization, (2001 – 2005)

China was declared as an official member of the World Trade Organization (WTO) on November 11, 2001. This event was witnessed as an historical event in China’s economic history because China’s accession to the WTO was very significant as it would eventually affect the flow of FDI into China in many ways. China’s has continuously fulfilled its given roles and responsibilities set by the WTO and China continues to enjoy economic benefits as a member of the WTO.

The membership of China in the WTO gives China the opportunity to carry out further economic reforms and restructure its economic legal framework on FDI to attain strong and progressive economic development. This eventually improved China’s economic and business environment and attracted more FDI into China. To encourage more FDI inflow, China gradually reduced industrial tariffs in various sectors of the economy. Foreign firms were given ‘direct trading rights’ to trade (import and export) without any interference from intermediaries or agents (State-owned trading firms). China’s reduction of tariffs offers opportunities or incentives for foreign investors to reduce their investment costs as they would avoid investing in other countries with high tariffs and high investment costs. These incentives increases investors’ confidence and attract more FDI to China (Yuan, 2006).

After China entered the WTO, China’s export market had expanded and continued to become larger because more incentives were given to export-oriented FDI. In contrast to the export-oriented, foreign multinational corporations (MNCs) were attracted by industries with potential in the domestic market for investment. These industries used to be dominated by relatively inefficient state-owned enterprises, such as telecommunication, banking etc.

2.2 Forms of Foreign Direct Investment

Export-oriented FDI was the dominant form of FDI in China in the reform era. The majority of FDI came from Hong Kong, Taiwan and Macau purposely to outsource their production due to increasing wages in their domestic markets. However, with China’s ongoing economic reforms and China’s accession to WTO in 2001, with China’s openness to the world and with the increasing wealth of the China, an attractive consumer market emerged and attracted corporations with market- oriented foreign investments from other parts of the world such as North America and Western Europe to invest in China.

The major forms of FDI in China’s export-oriented and market-oriented economy are: Equity Joint Ventures (EJV), Contractual Joint Ventures (CJV), Wholly Foreign Owned Enterprises (WFOEs), Joint Exploration and FDI Shareholding Inc. -Share Company with Foreign Investment (SCFI).

Equity Joint Ventures (EJVs)

Equity Joint Ventures, also known as shareholding corporations are set up in China with joint capital investments by foreign investors and local Chinese investors. EJVs are limited liability firms with a fixed period of thirty to fifty years. The partners in the Joint ventures operate and manage the day-to-day affairs of the business together. Profits and losses of the business are shared proportionately between the joint venture partners.

For foreign investor (s) to become a joint venture partner with a local Chinese investor (s) in China, the foreign investor (s) should contribute initial investment capital of 25% and above. Once a joint venture is registered, it is considered a Chinese legal entity and must abide by all Chinese laws. The joint venture is free to hire Chinese nationals without the interference from government employment industries as long as they abide by Chinese labour laws. Joint ventures can also purchase land and build their own buildings. The positions of chairman and board of directors of a joint venture can be held by either party.

Investors in EJV partnerships are prohibited to withdraw the registered capital during the life-span of the contract and share holdings are approved by the government to be transferred. The value of buildings, equipment, materials, intellectual property rights, and land-use rights are approved by government authorities before any joint venture can be approved.

To remit profits abroad, foreign exchange accounts are balanced so that the remitted foreign exchange is offset by exports from the joint ventures. However, with China’s continuous opening market and the elimination of foreign exchange, this requirement is becoming rare.

The EJV partnerships are also purposely established to explore the manufacturing capability, market knowledge and preferential market treatment of the Chinese investors and the technology, manufacturing expertise, and marketing experiences of the foreign investment partners.

Contractual Joint Ventures (CJVs)

Contractual Joint Ventures, also called Cooperative Joint Ventures are businesses jointly established in China by foreign firms, businesses or individuals with local Chinese firms, businesses or individuals.

CJV was considered to be the most important form of FDI in China during the early reform era in the 1970s due to the fact that it is flexible and low risky. Contractual Joint Ventures may or may not be registered as legal entities, and investment in a CJV can be in the form of land, capital and technology etc. The liabilities of a CVJ can be bore independently by the joint parties when they operate separately as legal entities.

When establishing a CJV, the parties in the joint venture signs the contractual agreement with the prescription of their respective terms and conditions on how income should be distributed, how management and responsibilities should be carried out and how transactions, negotiations, profits and risks should be managed and carried out etc. Profits and losses in the CJV are shared by investors according to the terms and conditions in the contract. Income made from a CJV is sometimes distributed in products or services and the proportion of profit distribution may not be the same as the proportion of the initial investments.

In a contractual joint venture, there is no standard requirement for foreign investors for initial contribution to start-up a CJV with local Chinese investors. However, any form of initial contributions made by foreign investors (as agreed in the contract) to initiate and establish a CJV must not be less than 25%. Start-up assets such as technology, machinery, buildings and even capital can be provided by the foreign partner (s) while the local Chinese partner (s) may provide land, labour and also capital for the joint venture. Labour can also be provided by the foreign investor if there is a need for high-skilled labour or shortage of labour.

In contractual joint ventures, foreign investors are allowed to withdraw their registered investment capital fully or partly and there are no provisions for the term of duration for CJVs. The contract duration of contractual joint ventures may be subjected to the consent of the parties involved and approval from the examination and approval authorities.

Wholly Foreign-Owned Enterprises (WFOEs)

Wholly Foreign-Owned Enterprise is a firm, enterprise, institution, organization or an economic entity solely owned by the foreign investor (s) in China. WFOE is a limited liability company wholly funded by foreign the investor (s) investing in China. WFOEs are established in accordance with Chinese laws and regulations by which WFOEs must agree to comply. The laws and regulations governing the Wholly Foreign-Owned Enterprise are the Laws on Enterprises Operated Exclusively with Foreign Capital (1986) and Enforcement Regulations (1988). Wholly Foreign Owned Enterprises were originally established with the aim to encourage export-oriented and advanced technology manufacturing activities.

Wholly Foreign-Owned Enterprises provides greater portions of FDI in China. In 2014, WFOEs provided 947.37 million USD which was 79.1% of total FDI.

Tabel 2.1 Amount of Foreign Investment by Form (2014)

Source: China Statistical Yearbooks, 2015

When applying to establish a WFOE, the foreign investor (s) are required to write a business scope with the business activities that the WFOE will conduct in China. The business scope is very vital that it encompasses all the business activities (present and future activities) of the WFOE. The WFOE can only conduct business activities within the confines of the approved business scope. The first business activity on the business scope usually identifies the overall nature of the WFOE for classification purposes. The minimum required capital, type of invoices and type of applicable taxation are further identified by the classification. The business scope usually constitutes consultations on investment management, international economics, trade information, marketing and promotion, corporate management, technology and manufacturing etc.

The Chinese government allows foreign investors to establish foreign-owned enterprises in areas that are potential and conducive (encouraged areas, prohibited or restricted areas) for foreign business activities to flourish and bring economic development changes and benefits. The areas encouraged, prohibited and restricted for setting up WFOEs by foreign investors can be found in the Catalogue of Guidance to Foreign Investment. The Catalogue of Guidance to Foreign Investment was amended in 2007 as China’s accession to WTO in 2001 opened more opportunities WFOEs.

Joint Exploration

Joint Exploration is a form of FDI in China that mainly involves in the exploration and extraction of valuable natural resources or minerals such oil, gold copper etc. In joint explorations, natural resources are explored, developed and produced. Joint exploration is prominently characterized with high investment requirements, high risks and high investment rewards. The investment risks and rewards are shared among shares hold by shareholders. Joint exploration is often carried out internationally in collaborations between foreign and Chinese companies to explore and extract natural resources. Joint exploration provides opportunities for Chinese companies to access advanced technologies and technical skills and knowledge from foreign investment companies.

FDI Shareholding Inc.-Share Company with Foreign Investment (SCFI)

The Share Company with Foreign Investment is a form of FDI in which foreign investors or companies set up limited stock companies with local Chinese investors or companies. Share companies with foreign investments are set up in accordance China’s stock laws and regulations and the principal of the SCFI is made up of equal amounts of stocks. Each shareholder takes responsibility for the company with accordance with his/her amount of stocks. However, the shares purchased and held by foreign investors are required to be more than 25% of the registered capital.

2.3 Determinants of Foreign Direct Investment

China’s massive and fast growing economy has many potential country advantages that are considered to be determinants of FDI. Studies on the determinants of FDI inflow in China done by Liu et al (1997), Wei and Liu (2001), Zhang (2002) and others have shown that determinants of FDI can be classified into Micro, Macro and strategic determinants. Micro FDI determinants are determinants such as company ownership, company size and product differentiation. Macro FDI determinants are the host country’s market size and growth which are measured by gross domestic products and gross national products. Other macro FDI determinant factors are exchange rate, tax, political risk etc. Strategic determinants are long-term determinants relating to diversifying a company’s business activities and defending existing foreign markets. In this section some notable determinants of FDI are identified and analyzed.

2.3.1 Market Size

The market size, the prospect of potential future market growth and the degree of economic progress of the host country are the significant factors for attracting FDI. Studies have shown that China exceptionally has these characteristics and therefore offers more and more opportunities to foreign investment firms to invest in China and take-up ownership.

Market size is one of the significant determinants of FDI inflow in China. China’s market size is potentially significant for FDI market prospects and attraction because market-oriented foreign investments look for a greater market size which provides greater demand and cost advantage with increased output. China’s larger market size, high degree of economic development and fast economic growth provides better business opportunities for market-oriented FDI firms to invest in China and take ownership. It also provides larger economies of scale and spill-over effects. China’s market size can be seen in terms of:

1. Population

China’s large population size also plays a vital role in FDI attraction, which means that demand for goods and services are high with larger population. China’s market size does not only attract market-oriented FDI, but also attract export-oriented FDI by providing opportunities for economies of scale.

1. Industry

China also attracts FDI by its massive Industrial size. Hence China has the largest industry in manufacturing and processing of goods and services and attracts more FDIs. More than 60% of FDI were distributed to the manufacturing industry in 2014. For example, according to the International Baccalaureate Information System World (IBISW) report, February 2016, China has become the largest manufacturing center for electronic outputs such as televisions, computers and handsets. China's productions of medium- and low-end electronic components were found to be the highest in the world. In 2015, the Manufacturing industry for electronic parts in China grew by 6.2% with $US196.2 billion.

China’s real estate industry also attracts large amount of FDI as data shows that in 2014, real estate industry was given the largest share of FDI after manufacturing industry. (China Statistical Year Book 2015).

According to FDI determinants studies done by Swain and Zhang (1997) and Liu et al (1997) using GDP and real GDP growth rate, market size is the fourth most significant economic determinant for FDI inflow in China. The empirical results from these studies showed that the real GDP growth rate was significantly related to FDI inflow in China. Results of most empirical results have proven that market size is the most important FDI determining factor that attracts FDI to China.

2.3.2 Market Growth

Market growth is related to market size as the key variable in attracting FDI, and it is measured as the growth rate of domestic markets. The degree of market growth of the Chinese economy is the important determinant of FDI inflow into China. According to the World Bank (April 6^th, 2016), China has experienced rapid social and economic development since the market reforms in 1978. China’s annual GDP growth has averaged nearly 10%. The strong and rapid economic and market growth of China over the last 30 years had obviously created conducive economic environment and investment business opportunities, attracting many foreign investments into China. China’s strong and viable market growth had also gained investors’ confidence to invest in China.

2.3.3 Cost of Labour

Cost of labour is one of the most attractive determinants of FDI inflow in China, however it is also a most controversial and debated determinant because of off-sets in high and low wages and skills. Studies have shown that most foreign investors take advantage of low labour costs. China has the largest population in the world, and it is found that more workers are willing to work for salaries below average.

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