Economic Reforms Aimed at Opening Up of the Chinese Market for Foreign Direct Investment - Term Paper Example

Economic reform: FDI and China Introduction It has been argued that economic reform measures including trade liberalisation, FDI and privatization have been contributing to bringing the Asian economies under the folds of globalization. The aim of this research is to provide support to this statement based on the relevant evidence from Chinese economy and its economic measures. Economic and other measures in China China is one of the fast growing economies in the world, which has become one of the leaders as a top foreign direct investment destination among all countries with developing economies (Tuan, Ng & Zhao, 2009). In the global scales, the share of world FDI inflow to East Asia has increased dramatically during the period from 1979 to 1994, from 2% to 17%, respectively (He & Sun, 2013). This increase is mainly attributed to the increased FDI inflow volumes to China (He & Sun, 2013). One of the reasons of such a significant progress is attributed to the economic and financial reforms implemented since 1978 (OECD, 2003). Aiming to provide a business environment conductive to Foreign Direct Investment (FDI), Chinese economic system has been transformed from a closed system to a system open to investment and trade (OECD, 2003). Chinese government has adopted the gradual approach for opening-up the economy and deregulating financial market (He & Sun, 2013). As the first step, the government of the People’s Republic of China has introduced fiscal incentives (for example, lowered taxes in the early 1980s). Further, in order to attract FDI, the government has created more convenient and favorable environment for doing business in China and undertaken the following initiatives: reduced delays in approving FDI projects, expanded and improved the physical infrastructure in the country and established a sound legislation related to FDI (OECD, 2003). In addition to these economic reforms, China has accessed the World Trade Organization (WTO) in December 2011, and as a result there were introduced some major advances in FDI policy: removed trade-related investment measures (such as export-performance requirements and local-content requirements), opened services sectors, freed labor market which was formerly state-controlled, etc. Moreover, the government of China has signed the agreements with several countries, guaranteeing increased market access for foreign investors and further lowering of trade barriers (OECD 2003, 70). Even though the companies can freely transfer their profits and other income abroad due to convertibility of the China’s currency, there still are in place capital-account controls (OECD, 2003). Economic reforms in China have allowed potential investors to establish wholly-owned foreign enterprises and joint-ventures and thus have opened its doors for multinational corporations and other international investors (Zhao, 2013). Brief overview of the globalized economy: major economic indicators The role, the FDI has played in the economy of China, was significant. The reforms introduced in late 1970’s have contributed positive results to the China’s economic growth during the two last decades of the twentieth century. However, it is still important to note that this growth has been a result not only of FDI attraction initiatives but also a result of other changes in government economic policy. The recent year’s performance also has shown that the country has a strong economic growth, whit average growth rate of GDP of 10,2% during the 2003-2014 (Economic Landscape, 2014). Despite the recent global financial crisis of 2008, China also has managed to maintain strong economic position with a growth rate 9,2% in 2009 (Economic Landscape, 2014). While the growth rate has decreased during by 2012 to 7,7% as a result of exports hampered by the Eurozone debt crisis, the country’s economic position still is evaluated as sustainable and strong (Economic Landscape, 2014). Liu suggested that the impact of FDI on the Chinese economy could be measured by evaluating such key indicators as GDP, Capital Formation, employment, and openness (Liu, 2011). Output: Real Gross Domestic Product This indicator helps multinational companies, willing to expand business in a specific country to evaluate the whole size of the potential market in the host country (Liu, 2011). The real GDP of China has shown very strong and continuous growth during the last few decades. Thus, for example, in the 1960s, in the 1970s, the 1980s and 1990s the real GDP of China was 3 per cent, 7,4 per cent, and 9,7 percent, respectively (OECD, 2003). Capital Formation Capital formation is recognized to be a significant indicator of the country’s economic growth as it helps to measure the annual domestic capital formation as a percentage of the annual GDP of the country (Liu, 2011). Employment Employment is another important indicator of the health of the country’s economy, as it helps to measure level of labor force participation in economic activities (Liu, 2011). Openness Openness is the extent to which an economy is open for international trade and business activity, and is measured by calculated as a ratio of the total annual exports and imports to annual GDP (Liu, 2011). While the general effect of the FDI on the Chinese economy and international trade activity is obviously positive, many studies indicate that this effect is not equally distributed across the 19 industries and 30 provinces in China (Ran, Voon & Li, 2007). Thus, for example, Ran, Voon & Li (2007) have carried out a study and have drawn a conclusion that provinces in the coastal and eastern regions are the major beneficiaries, while the central and western regions lose. Conclusion Economic reforms aimed at opening up of the Chinese market for FDI inflow have made a significant contribution to the great economic growth of the country during the past three decades (Zhao, 2013). Analysis of the key economic indicators has shown that the country has successfully opened its “doors” for globalization, as international companies and multinational corporations have got an opportunity and freedom to enter new market and share their products, assets, services, and other activities on the global scales. References: Economic Landscape. (2014). China Country Profile, 48-59. He, Q., & Sun, M. (2013). Does Financial Reform Promote the Inflow of FDI? Evidence from Chinas Panel Data. Global Economic Review, 42(1), 15-28. Liu, Liyan (2011). "FDI and Economic Development: Evidence from Mainland China". Journal of service science and management (1940-9893), 4 (4), p. 419. Ran, J., Voon, J., & Li, G. (2007). How does FDI affect China? Evidence from industries and provinces. Journal Of Comparative Economics, 35(4), 774-799. Zhao, Shiyong (2013). "Privatization, FDI inflow and economic growth: evidence from Chinas provinces, 1978--2008". Applied economics (0003-6846), 45 (15), p. 2127. OECD (2003), OECD Investment Policy Reviews: China 2003: Progress and Reform Challenges, OECD Publishing. Tuan, C., Ng, L., & Zhao, B. (2009). Chinas post-economic reform growth: The role of FDI and productivity progress. Journal Of Asian Economics, 20(3), 280-293. Read More