China_Fdi

Foreign direct investment (FDI) was a key factor in the rapid economic growth and structural transformation in East Asian countries. FDI makes significant contributions to economic growth. FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country (Hill, 2002, p182). There are four types of FDI that are outsourcing, trade-barrier-circumventing, market- and technology-accessing, and round-tripping.The FDI inflows and outflows also made the economic growth in the Asian during the last two decades. There are three parts: shift in comparative advantages, shift of Japanese FDI from North America to Asia following yen’s appreciation against Asian currencies since 1993, and shift in FDI to China. Fry, Jomo, Mardon, and Urata's findings (cited in Hahm & Heo 2008, p392) East Asian newly industrialising countries (ANICs) have changed their attitude toward FDI over time. For instance, Hong Kong, Singapore, and Malaysia adopted FDI-led industrialization policies for economic growth. To this end, these nations upgraded their industrial structures and comparative advantages to encourage foreign transnational corporations (TNCs) to invest, particularly in high value-added industries. In contrast, some Asian countries were not friendly until mid-1980s, such as Indonesia, South Korea, Taiwan, and Thailand (Hahm & Heo 2008, p392). "Since then, they aggressively attracted foreign capital (direct and portfolio) into their countries to continue to develop their economies. To this end, these nations have implemented vigorous reforms and improved their business climates, as well as policies" (Hahm &Heo 2008, p392). There are some benefits of FDI. Borensztein, De Gregorio, and Lee findings (cited in Hahm &Heo 2008, p393) first FDI provides valuable capital for investment, which can compensate domestic savings to increase financial resources for economic expansion. Given that TNCs tend to invest in long-term projects, FDI through TNCs can be a stable source of capital. Second, FDI, particularly in the manufacturing sector, generates employment through new business or expanding existing business. "Third, through FDI from TNCs, host countries may receive technology transfers. Fourth and finally, FDI introduces foreign market access for goods and services via TNCs, which help industries to internationalize utilizing the host nation's international comparative advantage" (Hahm & Heo 2008, p393). East Asia has also enjoyed the benefits of FDI discussed above (Hahm & Heo 2008, p393). Urata findings (cited Hahm & Heo 2008, p393) FDI brought to East Asia made two significant contributions. First FDI provided financial resources for fixed investment, as well as technologies and managerial know-how. These skills and knowledge played crucial roles in East Asian economic growth. Second, FDI enabled East Asian countries to access networks of foreign firms for sales, procurement, and information, which significantly improved production and marketing efficiency. The focus of foreign direct investment in Asia since the 1985 Plaza Accord has shifted from the ANIEs and further to China and this process has been broadly in line with the flying-geese pattern (Kwan 1996, p160). This flying-geese model changes comparative advantage. “The flying-geese model was first used to describe the life cycles of various industries in the course of economic development. It has been used to study the dynamic changes of the industrial structure in specific countries, and also the shift of industries from one country to another. The change in the industrial structure of a country can be represented by a set of inverted V-shaped curves which chart the changing competitiveness of individual industries over time” (Kwan C, 1996, p162). [pic] This figure (a) is shown that a typical sequence is the shift from the textile industry to the chemical industry and then further to the steel and the automobile industry. Figure (b) is shown in the same industry in different countries (instead of different industries in the same country). A typical example is the shifting of textile production from Japan to the ANIEs and then further to the ASEAN countries and China (Kwan C, 1996, p163). The flying-geese model explains the shifting competitiveness of an industry over time by focusing on the dynamic changes in factor endowments (labour and capital) that countries usually experience during the course of economic development (Kwan C, 1996, p163). In 1993, Japanese foreign direct investment change from North America to Asia because yen's appreciation against Asian currencies. "According to Japan's Ministry of Finance, Japanese FDI in Asia jumped 43.2 percent in the 1994 fiscal year, after declining for four consecutive years between the 1990 and 1994 fiscal year. The increase is particularly marked for investment in Asia's manufacturing sector, which has surpassed Japanese manufacturers' investment in North America '' (Kwan 1996, p163). This can be reflected in two figure: Japan's direct investment in the Asian countries and Shift of Japanese FDI from North America to Asia (manufacturing). [pic] From above bar chart we can see that Japan's FDI in ASEAN from 1989 to 1994 has been increased slightly (from $2782 million to $3888 million), in China has a dramatic rise from $438 million to $2565 million. To sum up, we can say that Japanese foreign direct investment in Asia was increased from 1989 to 1994. [pic] [pic] In this figure, from 1988 Japanese FDI in North America has been decreased and in ASEAN and China have been increased, so we can say that Japanese FDI shift from North America to Asia. “The shift of Japanese investment to Asia largely reflects the high profitability of investment in the region compared with Europe and America" (Kwan 1996, p163). According to a survey controlled by the Japanese Ministry of trade and Industry (MITI), the ratio of recurring profits to sales in Asia has been higher than the rest of the world (Kwan 1996, p163). In contrast, the yen's current rise favours the member states of ASEAN and China more than the ANIEs after the 1985 Plaza Accord. The range of industries in ANIEs can benefit from the high yen has narrowed because ASEAN countries and China's growing competition (Kwan 1996, p163). As yen's appreciation, the ASEAN countries are in a better position to benefit, as the large inflow to the region of Japanese investment since the late 1980s has laid a foundation for further development. ASEAN are enjoying an inflow of investment from Japan and acceleration of exports on the back of a stronger yen (Kwan 1996, p164). As a percentage in GDP from 1990 to 1996, Asia has been increased from 1.3% to 2.7%, East Asia increased from 1.6% to 3.4% (Hill & Athukorala 1998, 25). "A virtuous cycle between the inflow of foreign direct investment and industrial development seems to be firmly in place" (Kwan 1996, p165). The foreign direct investment boom in China that started in 1992 had continued. More and more foreign countries investment in Asia has been shifting from the ANIEs to ASEAN and further to China because China has large population and high growth rate (Kwan 1996, p166). Hill's (2002) positive review claims foreign direct investment surged to an annual average rate of $2.7 billion between 1985 and 1990 and then exploded to reach $45.2 billion in 1997, making China the second biggest recipient of FDI inflows in the world after the US. About 80 percent of that investment has come from other Asian countries, such as Hong Kong (which is now part of China), Singapore, Korea, and Japan. Following the table below (Foreign direct investment in China by country) we can see that China received US$27.5 billion in FDI in 1993 and US$33.8 billion in 1994, up from US$ 11.0 billion in 1992. In 1994, Hong Kong (and Macau) invested US$20.2 billion in China, accounting for 60 percent of the total, followed by Taiwan's US$3.3 billion (10 percent of the total). Foreign direct investment in China by country [pic] Chen, Chang, and Zheng (1995) provide a data, by 1990, FDI's contribution to China's TFAI (Total fixed asset investment) grew to more than 3.6%. The growing importance of FDI can also be seen from the fact that it represented almost 1% of China's GNP in 1990, although it had been a negligible 0.04% in 1979. Over the past 20 years, this inflow has resulted in establishment of 145,000 foreign-funded enterprises in China, which realized capital investments of $216 billion. Overseas Chinese interests that have supported the ASEAN economies have also sharply increased their investment in China. Singapore is also promoting itself as the gateway to China, while its government is taking initiatives to build industrial estates in various parts of China (Kwan 1996, p169). The shift of investment to China has caused some anxiety within ASEAN over the adverse effects it might have on regional economic development. In order to improve their attractiveness to foreign investors, the ASEAN countries are undertaking new measures to deregulate industries and redress domestic market. The ANIEs are also taking positive steps to reverse the shift of foreign direct investment to China, such as South Korea has shifted to a more aggressive approach. In conclusion, foreign direct investment played an even more important role in East Asian countries' industrial transformation through transfer of technology, management practices, and marketing know-how, while improving the overall quality of in vestment. Following on the FDI is become more and more popular in the world especially in Asia; it affected Asian comparative advantages and recipient of FDI inflow country. To sum up, foreign direct investment inflow and outflow play a major role in East Asian and promote Asian development. Reference Chen, C Chang, L & Zheng Y 1995, 'The role of foreign direct investment in China's post-1978 economic development', World development, vol.23,no.4, pp691-703. Hill, H & Athukorala, P C 1998, 'Foreign Investment in East Asian: A Survey', Asian-pacific Economic Literature, vol.12, issue 2, pp23-28. Hahm, S D & Heo U 2008, 'U.S. and Japanese Foreign Direct Investment in East Asia: A Comparative Analysis', Policy Studies Journal, vol.36, no.3, pp385-401. Hill, C W.L 2002, International business, McGraw-Hill/Irwin, New York. Kwan, C. (1996), "A New Wave of Foreign Direct Investment in Asia", in Das, D.K. (ed.) Emerging Growth Pole: the Asia Pacific Economy, Prentice Hall, Sydney (Chapter 7).