This paper will present and explicate the past image of Foreign Direct Investment ( FDI ) in China in 1990s. This period can be considered as the important period when China is regarded as one of the most of import FDI host states in the development states. The account of relevant theories on FDI will further supply the sound apprehension of the outgrowth and development of FDI. In the early 1990s, the FDI in China has experienced the rapid development due to the Open Door policy and WTO accession. However, the growing rate of FDI in China in the late 1990s is lower than in the early 1990s because of partially Asiatic Financial Crisis in 1997. The past image of FDI will be explained and evaluated in paper.
1. The Theoretical Perspective of FDI
A figure of theories have been proposed by bookmans to explicate the nature, causes and location of FDI. Broadly speech production, there are five major schools of idea on the issues. This subdivision will measure the several theories to explicate FDI.
1.1 Neo-Classical Theory
This theory sought to explicate the motion of planetary capital on the footing of Hecksher-Ohlin-Samuelson theoretical account. In footings of Mark ( 1992 ) , international fund flows of production factors, including foreign capital are determined by differences between resource gift and factor proportions among different states. Hence, investings flow from comparatively capital-abundant states to comparatively capital-scarce states. In other words, the theory focuses on involvement rate derived function as explanatory variable of cross-border capital motion, which will halt one time the fringy productiveness of capital in both states is equalized.
1.2 Industrial Organization Theory
Stephen Hymer developed an Industrial Organization theory in 1960s as the classical theory failed to explicate explicitly the multinational motion of direct investing. The kernel of the theory is that FDI is a consequence of market imperfectnesss, which can be caused by both goods and factor markets, scale economic systems, and authorities imposed ordinances, particularly duty and trade barriers that prevent the efficient allotment of resources and distribution of merchandises ( Qu and Green, 1997 ) . Harmonizing to Hymer ( 1976 ) , when straight invest abroad, MNCs face disadvantages, such as the information cost and uncertainnesss sing the operation of houses within an unfamiliar foreign political, economic and societal system, in comparing with autochthonal houses. Therefore, they must possess some house specific advantages, which can be expressed as fiscal strength, patented engineering, merchandise derived function, established market, and managerial and selling accomplishments, to counterbalance for those built-in disadvantages and outbid domestic houses.
1.3 Internalization Theory
The internalisation attack to FDI, advocated by P. J. Buckley and M. Casson in 1976, marks a distinguishable displacement from explicating why or how a MNC engages in international production to covering the inquiry of maintaining certain activities under a MNC ‘s control ( Buckley and Casson, 1976 ) . It calls attending to advantages which may accrue to a house from internalisation, i.e. prosecuting in foreign production itself, instead than sub-contracting of licencing it to a foreign house ( Pont 2000 ) . The doctrine of the theory is that an MNC carry out assorted activities that are mutualist and related through flows of intermediate merchandises. Since market for intermediate merchandises are hard to form, these minutess can be handled more expeditiously within the house by an internal hierarchy instead than by an external market.
2. The Current Pattern of FDI in China.
In 1979, China introduced the Open Door policy and market reform, initiated by the constitution of Particular Economic Zones ( SEZs ) in order to pull foreign capital. China officially started its scheme of economic reform and opening up to the outside universe in 1978 in order to accomplish the aim of modernisation. On the external economic forepart, China formulated the Joint Venture Law in 1979 when foreign direct investing ( FDI ) was foremost permitted in China. In response to the advancement in economic reform and opening-up, the Chinese economic system has achieved a dramatic one-year growing rate of over 8 % and China is now a major host for FDI influx in the universe. The Word Trade Organization ( WTO ) accession makes it necessary for China to bit by bit set up an economic government with economic mechanisms that are in line with the advanced market economic systems. This will advance farther economic reform and accelerate China ‘s economic growing.
Foreign Direct Investment has experienced rapid growing since 1979. The growing has been capable to considerable fluctuations at different times. In big portion, the fluctuations of FDI reflect accommodations in Chinese authorities ‘s policies and alterations in the investing environment. In general, when China has a sound macro-economic public presentation and economic liberalisation, a rapid growing in FDI influx will take topographic point. On the contrary, hapless economic public presentation and authorities limitations have tended to deter economic reforms and hold the liberalisation procedure. Then, the volume of foreign investing will worsen ( Sun 1999 ) .
As shown in Table 2.1, existent FDI grew easy in 1990 due political issues. However, get downing in 1991, China has greatly increased its sum of foreign investing. The sums of existent FDI increased more than double in both 1992 and 1993 and rose a farther fifth part in 1994 to make about US $ 340 billion existent investing. The dramatic additions in FDI in the first half of the 1990s appear to be caused by four factors:
Table 2.1: Contractual and Actual Amount of FDI in China, 1990-2002
Number of Undertakings
Contractual FDI ( US $ 200 mil )
Growth Rate ( % )
Average Size of Projects ( US $ 1 mil )
Actual FDI ( US $ 100 mil )
Growth Rate ( % )
Realization Rate* ( % )
Note: * the realisation ration = existent FDI value / contractual FDI value.
Beginning: China Statistical Yearbook, 1991-2003.
First, the magnitude of aggregative FDI fluxing to less developing states ( LDCs ) increased significantly in the 1990s. China has been the universe ‘s largest FDI receiver among LDCs since 1993. In recent old ages, FDI to China histories for 1/4 to 1/3 of entire FDI influx to LDCs.
Second, China ‘s apparently political stableness, together with dramatic growing of the domestic economic system after 1992, has led to a cardinal reappraisal by foreign investors of China ‘s economic and investing potency. As a consequence, China is regarded as a less hazardous political and economic environment by international hazard appraisal organisations such as Economist Intelligence Unit ( Lardy, 1995 ) .
Third, China has consistently liberalized its foreign investing government. Some of the discriminatory interventions to pull FDI such as particular revenue enhancement grants, liberalized land leasing and so on, were merely available in the four SEZs in the south coastal part in the late seventiess and early 1980s. This state of affairs has been changed since the 1990s when the particular commissariats were made widely available in a turning figure of coastal metropoliss, economic development countries and high engineering development zones. China besides open up sectors such as existent estate, trading and retailing which has been antecedently prohibited for foreign investors. Liberalization of FDI in the belongings market contributed much for the rapid growing of FDI in the early 1990s.
Fourthly, an addition in FDI influx is partially due to the phenomenon of recycled capital of Chinese beginning. In order to take advantage of the particular revenue enhancement and other inducements provided to foreign invested endeavors, many Chinese houses can non afford non to travel out and put back into China which is considered “ foreign investing ” . Therefore, there was a inundation of Chinese houses traveling money off-shore and so recycled it back into China. The World Bank estimated that these might
Table 2.1 demonstrates a slightly different form in the growing development of contractual and existent FDI sum in the early 1990s. The contractual FDI increased aggressively in early 1990s. In 1993, both the figure of undertakings and the entire contractual sum reached their highest degree. However, the existent sum of FDI has grown more easy and did non get down to diminish until 1999.
From 1990 to 2002, the FDI realisation rate of China has increased steadily till 1999, with the exclusion of the early 1990s. As mentioned above, there was an obvious spread between contractual and existent FDI influx during this period. The political turbulency in 1989 contributed to the diminution in the per centum of FDI realisation. In add-on, there was a fund deficit job due to authorities ‘s tight recognition squeezing to command the overheated economic system. Furthermore, many announced undertakings might non be realized. Phony joint ventures were set up to take advantage of favourable revenue enhancement inducements. Therefore, in the 1990s while contractual FDI surged to a record high, existent FDI use had merely increased easy. The realisation rate of FDI fell to its lowest degree of less than 20 % in 1992 but started to increase steadily since so.
This paper has introduced and explained the form of FDI in China. Furthermore, Neo-Classical theory, industrial organisation theory and internalisation theory will be introduced to explicate the kernel and doctrine of FDI. Before 1999, the existent sum of FDI has experienced the sound development. However, the realisation rate of FDI is lower, peculiarly during the period between 1990 and 1996. The challenges of fiscal crisis and concern environment confronting China will be considered as the important findings of FDI.