Importance of FDI and Export push to China - Essay Example

Importance of FDI and Export push to China China’s remarkable economic progress has been sustainable, with high growth rates since 1980s. This has stimulated discussions in the various countries to revolve around its success. The tremendous growths in the economy of the country are due to foreign direct investment made in the country as well as the voluminous exports by the country either to the regional countries or to the oversea countries (Neilson and Lu 2004: 87). This paper examines the possible explanation that of foreign direct investment and the export volumes made in china as the direct interpretation to its sustained economic growth. Introduction China has one of the world’s fastest growing economies that has attracted large amount of foreign direct investment over the last two decades. It has recorded the highest foreign development among the developing countries since 1993. Out of raw estimates, Chinas total amount of cash it has invested in FDI amounts to 488 billion US dollars between 1988 and 2003. The main question out of this enormous investment of china is whether it crowds out domestic investment or just complements it. To answer this question calls for analysis of the FDI benefits on the economic growth (Chen 2012:384). This remarkable economic development and sustainable high growth rates has stimulated vigorous debates among the learners in the recent years. Recent researches have attributed the inward foreign direct investment and the export push as the reason for remarkable growth record. Foreign direct investment and the export-push remain important to the economy of china. The foreign direct investment and the export push have played a significant role in making reforms and continuous improvements in both internal and the external economic environments of china (Lu and John2002:278). The foreign direct investment in china occurs in joint ventures, cooperate enterprises and the foreign owned enterprises. From late 1980s, the china entered into a period of large-scale industrialization and an active reform on the FDI, exports, and domestic market consumption, which form the primary drivers of its economic growth. China has built its economy on matters of exports much faster than the other economic heroes of Asia have. The foreign direct investment is also another very important factor in the economic development of China. There is a well establishment relationship between the foreign direct investment and the international export trade in that the FDI usually follows exports by its logic (Lu and John 2002:312). The huge FDI influx recorded has increase an annual rate of china by more than 10 per cent since 1985 on wards. This has been accountable for the China’s economic growth. The recent studies have reaffirmed the importance of inward foreign direct investment for the sustainable growth in china. The phenomenal growth of the export links and the inward foreign direct investment of China have various indications. The annual total growth within the same span of time was 21 per cent. China by this time accounted for 0.75 per cent of the world’s export in 1978. The share rose to 3.3 per cent a year later. By 1994, china exported manufactured goods worth 100 billion US dollars clinching the eighth position in the world in terms of production. The foreign direct investment has a direct influence on the export rate of the republic of china. In an isolated case in 1970s, the Chinese republican produced the largest share in the world export market. The country also took the second position in terms of foreign direct investment after the United States. Since 1993, the total FDI of the republic of china has been raising up to 200 billion US dollars, which amounts to 31 per cent of the total FDI in all the developing countries (Chen 2012:397). The share of foreign exports of china increased from negligible amounts in the early 1980s to 20 percent in 1992 then to 41 per cent in 1998. The foreign direct investment and the china’s exports have a direct influence on its market and economic situation. The FDI in the early 1980s made a negligible contribution to the Chinas economic growth and the total output. However, six years later the passage of the China’s foreign investment law made the exports to shoot to 297 billion US dollars, which accounted for about 32 percent of the worlds total export output. This sharp increase in the annual gross out put led to the establishment of a program of export processing under which the inputs intended for export were imported duty free and with a minimum administrative interference (Hope, c. At al. 2003:18). Despite all these, the Chinese government has the potential of becoming the largest exporter of labor-intensive products like the textile materials. FDI and exports have led to low cost labor exploitation, especially in the 1980s when the domestic investment had limitation due for financial constraints. This bridged the source gap and took the risk of developing new exports (Neilson and Lu 2004:147). They provided an additional capital that is critical for china to build up its initial base of labor-intensive manufacture of the exports. The excess foreign direct investment provides assets for export orientation production in the technology intensive and dynamic products in the world trade. These assets are often costly and difficult for the Chinese firms to acquire independently. This transfer of the same assets through foreign affiliates or non-equal partners in china was acquired through training, skills development, and knowledge diffusion, which opens up the urge for further dissemination to other enterprises in the larger market. The FDI and the exports of china facilitate china’s access to new and the larger world market. This larger market involves the foreign affiliates and privileged access to not only the international production systems. Moreover, these links to the world market extend to suppliers and other domestic firms. In addition, as in the case with the United Sates, china also benefitted from the lobbying activities of MNCs in their home countries for favorable treatment of exports from their affiliates abroad. Exports from china provide training for local workforce and upgrade technical and managerial kills that will directly benefit the Chinese exports. This actually applies for export-oriented investment in advanced technological capabilities. The foreign direct investment facilitates the export rates in china through spillover programs that increase the exports by observing the export activities. The local firms have from repeatedly improved from the observation of foreign facilitators and made a thorough use of the infrastructure for transport, communications, and financial services that develops to support those activities. In addition, the foreign direct investment has influence on the competitive domestic firm exports and the diffusion of new technologies (Yao Et al. 2010:59). The local and foreign firms of china have a strong relation aimed at improving the inputs of local firms and the China’s export as well. The following graph shows the export growth of china since 1990. Accessed from http://www.google.co.ke/imgres?imgurl=http://static7.businessinsider.com/image/4efb36aaecad04264000001e/china-fdi.png&imgrefurl=http://articles.businessinsider.com/2011-12-28/markets/30564114_1_exports-fitch-china-development-bank&usg=__hKxqyPpKgp2KdOigEpEGRkEYvco=&h=344&w=778&sz=67&hl=en&start=4&zoom=1&tbnid=cG995LMw20tk8M:&tbnh=63&tbnw=142&ei=6O2oT761N8ucOpvsnbED&prev=/search%3Fq%3DFDI%2Band%2Bexport%2Bchina%26um%3D1%26hl%3Den%26client%3Dfirefox-a%26sa%3DN%26rls%3Dorg.mozilla:en-US:official%26channel%3Dfflb%26tbm%3Disch&um=1&itbs=1 Generally, the FDI of china takes five stages of development. The first stage permitted china to grow in a step-to-step manner. It was in order for the country to establish four special zones that would absorb and utilize the foreign investment. These four zones not only attracted success in providing foreign direct investment but also served as buffer for those afraid of the of foreign investment being the cause for bourgeois spiritual pollution (Chen 2012:401). China however intended to complete its legislative system, which would validate both the FDI in china and guarantee the benefits and rights of the foreign investors. Another important policy at this stage was the regulation and the implementation of the law for the peoples of china on a joint equity venture. China then entered into the growth then peak stages of their FDI growth. In these stages, it witnessed an economic skip with the opening up of Pudong New Area. China at this time was referred to as an international hub for finance, economy, and trade. The hi-tech enterprises, established manufacturers and the financial companies encouraged china to operate and preferential treatment from both the central and the local government (Neilson and Lu 2004:214). The government simplified its terms of FDI administration in order to seek developments for the inner regions that were less developed and industrialized. At this time, the Chinese government announced its intention to expand the socialist market economy and the standard market operation. The Chinese FDI stabilized at 1994 when it realized a relatively high rate of foreign investments. According to the provision guidelines of this time, the enterprises were encouraged, restricted, and permitted to exceed domestic demands for those that engaged in the exploration of rare and valuable resources. China at this time had an opportunity to further its economic reforms and restructure its legal framework. This led to a consequent improvement of its business environment and attracted more foreign investors. Despite all these, China has the largest and the fastest growing population, which increasingly expand the market and the domestic consumption. Thus, the country’s FDI from countries like USA and Europe are directed towards market orientation and investment. The Chinese fast growing economy attracts foreign investment that has reflected a cheap labor force (Hope At al. 2003:37). This is due to its multinational firms that pay premium to the workers. The following table gives FDI of China in 2010 Accessed from http://www.china-briefing.com/news/2010/11/16/chinas-fdi-increases-7-86-in-october.html China has succeeded in attracting volumes of FDI that are very important to its economy. The FDI and the volumes of exports in china have contributed greatly in the GDP growth. This is evident in several ways. They have added capital formation and cash inflow in the country. They have also contributed to a higher GDP through the positive effects on the total productivity. The FDI and total export have also influenced the growth of GDP through establishment of FIEs that directly have positive spillover effects on the domestic enterprises (Ding and Knight 2007:467). The FDI and the national exports are the major players of the China’s international trade. This is due to the country’s policy to towards FDI and exports that strongly encouraged export-orientation activities and foreign investment. The FDI and the export-push have created employment opportunities through their FIEs. These employment opportunities have been concentrated in the eastern region provinces of the country because of the high number of towns in the country (Neilson and Lu 2004:301). The FDI and the exports have also had impact on the technology transformation. The transfer of FDI had been particularly low in early days but with the high technology transfer, the flow of FDI and the total exports have been satisfactory high. The FDI has bridged the technology gap into an incomplete package and has a dominant flow of hardware hamper that has advanced the technology transfer. Generally, FDI and exports contributes positively to the economic development through raising the GDP and increasing the factor of productivity by establishing foreign–funded enterprises. The FDI of china also play an important role in increasing the country’s exports, which directly have a huge trade surplus. The FDI and the exports of china have also increased the employment opportunities through FIEs, though this widens the gap between the eastern and the western china. However, the FDI and exports of China face some challenges and opportunities as well (Chen 2012:514). One common challenge is the appreciation of Chinese Yuan compared to the world currency. There is also increasing production cost because of the increase in the cost of raw materials and labor. The government however encourages the investment in western china and takes measures to protect the environment. All these provide a new opportunity for the Chinese export market and FDI. Conclusion China has made successful attempts in attracting the FDI from other countries since 1980s. The thirty years of history of the Chinese FDI improvement has had an evolution on the political and economic system of the country. The average growth of FDI and export growth in china is about 18 percent and 12 percent respectively. This is a sufficient development for the Chinese economy, its people, and the economic growth. However, this trend will only hold if the world economies get better or the Chinas legal system become more effective in enforcing contracts in the western china. Hong Kong and Moscow have accounted for most of the China’s FDI growth (Neilson and Lu 2004:317). The FDI and the exports of china are catalyzed by different factors. Some of the FDI investors are interested by the Chinese domestic market while others find ways to ensure lower cost of production. The good infrastructure system in China has improved technological levels hence the economies scale. Bibliography Brakman, S. 2006. Nations And Firms in the Global Economy. New York: Cambridge University Press. Chen, C. 2012. Foreign Direct Investment in China. Northampton: Edward Elgar Publishing. Ding, S. and Knight, J. 2007.China's Remarkable Economic Growth. Oxford University Press. Goodman, G, and Draguhn W. 2002. China's Communist Revolutions. New York: Routledge. Hope, c. At al. 2003. How Far Across the River? Stanford: Stanford University Press. Pg 510 Lu, D. and John, w. 2002. China's Economy into the New Century. New York: World Scientific. Neilson, W and Lu, D. 2004. China's West Region Development. Mecca: World Scientific. Rajan, R. 2008. New Dimensions of Economic Globalization. New York: World Scientific. Rawski, T. and Brandt, L. 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