DETERMINANTS OF FDI IN CHINA
Shaukat Ali and Wei Guo1
Why and how firms take advantage of foreign opportunities, especially via foreign direct investment (FDI) has been much documented. China, as a major emerging market, has attracted significant flows of FDI, to become the second largest receipt. This paper briefly examines the literature on FDI and focuses on likely determinants of FDI in China. It then analyses responses from 22 firms operating in China on what they see as the important motivations for them to undertake FDI. Results show that market size is a major factor for FDI especially for US firms. For local, export-orientated, Asian firms, low labor costs are the main factor. The paper concludes with managerial implications for businesses wish to exploit opportunities in China.
The past few years has seen a tremendous growth of foreign direct investment (FDI) that has exceeded both world output and world trade. China is by far the largest recipient, and in 2004 surpassed the USA as host destination. It has consequently attracted an increasing attention from multinational businesses. Since China adopted the reform and opening-up policy in the late 1970s, foreign investment has played an increasingly important role in its economic growth. According to the World Investment Report for 2004 by the United Nations Conference on Trade and Development, China absorbed a total of US$53.5 billion worth of foreign direct investment (FDI) in 2003. The Xinhua News Agency, quoting The National Development Reform Commission, China's top economic planning agency, reported that foreign investment in 2004 rose to US$60 billion, a 13 per cent increase over 2003. Contracted investment was US$153.5 billion in all of 2004, up one-third year-on-year. Other statistics also point to the importance of foreign capital in China's economic growth. At present, further economic development of China depends to a large extent on continuous FDI and policy-making that will facilitate inward investment. Moreover, China’s entry to the World Trade Organization (WTO) suggests that trade will play an important role in the country’s economic development. So under this new international environment, do multinational enterprises go to China to exploit some conventional advantages such as low labor costs, or do they have other motives to meet challenges of the new international competition? Foreign enterprises account for 28 per cent of China's industrial added value and one-fifth of taxation. They export about 57 per cent of the country's total goods and services and account for 11 per cent of local employment. China's preferential foreign investment policies, inexpensive labor, increasing purchasing power and improving investment environment, especially after entry into the World Trade Organization (WTO) in 2001, have made the country a favorite destination for global investment (Yunshi and Jing, 2005).
Shaukat Ali is a Senior Lecturer in Strategic and International Management, Department of Strategy, University of Wolverhampton Business School, UK. Wei Guo is Principal Consultant. Guo and Associates, Lao Hu Min Road, Shanghai, China. ©Journal of Global Business and Technology, Volume 1, Number 2, Fall 2005 21
Shaukat Ali and Wei Guo The aim of this paper is to investigate the determinants of FDI in China from the perspective of country characteristics, identifying what are the most significant factors in China that influence foreign investors’ decision to invest in the country. Several location advantages as determinants of FDI in China, drawn from previous studies, will be tested by primary research. Will there be evidence to indicate that China’s huge market size, liberalized FDI policy, and the regional distribution of FDI within China is influenced largely by FDI incentives and historical cultural links with foreign investors, or will other factors emerge. The result of this...