Foreign Direct Investment Influence on Chinas Jiangsu Province - Research Paper Example

FDI Influence on China’s Jiangsu Province FDI Influence on China’s Jiangsu Province The analysis of several research works based on the relationship between Foreign Direct Investment (FDI) and Gross Domestic Product (GDP) forms the center stage of this paper. FDI is attached to GDP via two mechanisms; Location and Digesting ability which have led to regional imbalances. The paper makes use of regression analysis which aids in unearthing that the a unit increase in FDI absorption in Jiangsu’s Southern region taking the lions share with central and north region being far much behind. It is revealed that 1.198, 0.429 and 0.572 are the regression coefficients for south, central and north regions. Based on the digestion ability index, there is a strong relationship between unit FDI rise and unit GDP contribution rate. Favorable policies to drive the future Jiangsu’s economy are thus embedded on the location and digesting ability in regard to these regions. FDI is the main reason for rapid economic development of the Chinese economy which has opened up enabling environment for the FDI’s absorption. A major increase in the FDI’s absorption is noted in the Jiangsu’s province with the figure of 8404.57 hundred million RMB in 2000 and busting to 34741.2 hundred million RMB after 10 years. This was more interesting as enormous growth rate of 313.61% reported. This was also accompanied by a rise FDI to 253.23 hundred million dollars from 64.24 hundred million dollars translating into a growth rate of 393.19%. These promising development, however, are under threat on non-equilibrium in regional developments. This is based on the division of Jiangsu in three distinct regions which depicts different FDI absorptions per regions which is in line with the GDP growth rates reflected in these three regions with southern region recording a faster development in the province. Use is made on the existing statics ranging from to further reveal the relationships between FDI and GDP growth in regard to Jiangsu province. Introduction On a wider coverage Foreign Direct Investment (FDI) has become the main source of global financing which has also been attached to increase in nation’s investment in Least Developed Countries’ leading to their subsequent economic and development. FDI is attached the increased capital stock, technological advancement as well as knowledge expansion currently evident in the developing nations. It is therefore important we study the role and the mechanism applied by the FDI in developing the economies of nations. The paper is intended to answer the reasons for a wider gulf amongst the Jiangsu’s regions. This is of greater significance as the Chinese economy is attached to these regional developments. If these gaps are left to broaden without a closer examination, it will pose a greater threat the state economy which may hurt the economy. Nations that have appreciated the role played by the FDI have thus derived more pros than cons and are heading towards being ranked top in terms of GDP growth. The paper will be based on three main key areas which have also been termed as the objective as stated below. Objectives The FDI’s direct mechanisms of actions on Jiangsu’s economic growth The FDI’s mechanisms of actions undertaken on Jiangsu’s regional capital The FDI’s mechanisms employed on Jiangsu’s regional technological advance Research questions 1. How does FDI as a major means of promoting economic growth drive Jiangsu’s economic growth? 2. What are other FDI’s roles in the three major regions of Jiangsu? Answering these research questions will be based on critical examinations of the earlier empirical and theatrical literatures already conducted. According to Chenery’s , Dual gap theory which states that in order to maintain a certain economic growth rate, the savings gap must keep pace with foreign exchange gap and that these two gaps can be concurrently offset through absorbing foreign capital. The theory presents the developing countries with a platform to boost their domestic fund inadequacy by using foreign investment. As Solow reveals in his growth model, he basis his argument on diminishing capital return with technological advancement being classified as fixed exogenous variable. This theory views FDI’s role of capital formation as only a short term effect to the economic growth and sustainable economic development is only achievable upon a growth of technological advance. Background FDI has played a pivotal role in boosting Jiangsu’s economy based on its capital formation, technological advancement as well as increased knowledge endowments within the three regions. This has ensured both social and economic development in the province with Jiangsu economy being ranked top in 2008 based on a 14.7% growth recorded from the previous year. Industrial management and its structural upgrading within the Jiangsu’s are all attached to the contributions of FDI which accounts for a greater percentage to the tune of 27.2% of the whole Chinese economy in respect to FDI’s contribution. Despite the positive impacts that the FDI has bestowed upon the Jiangsu’s province, there is a persistently regional imbalance in terms of economic growth. It is upon this premise that the research was conducted to reveal the driving force behind this phenomenon. It is worth noting that all the three regions show an increasing trend in terms of their economic growth. The main focus will be to investigate and report the possible causes of imbalances within the three regions of the Jiangsu province. Data and methods The data were collected in the year 2008 via the use of secondary methods of data collection that encompasses the data on FDI’s influence in Jiangsu for the period between years 1997 to 2007. The researcher makes use of economic development data for this period and uses several models which aid in unearthing mechanisms employed by FDI to enhance economic growth. This aids in development of an analysis framework which is ultimately utilized to explain the findings. The targeted area under study upon which the statistical data are derived remains the Jiangsu province mainly from the n its three main regions that were classified as Southern, Northern and Central Jiangsu. Results Theoretical results analysis The research reveals a direct relationship between the economic growth rate and the FDI. Jiangsu’s economic growth is attached to a two-fold FDI’s influence. On one end, FDI directly facilitates economic growth through technological advancement and capital formation. Technological advancement is attached to human capital endowments of different Jiangsu’s regions and this explains the existence of a wider regional gap with the southern region taking the lions share and subsequently controlling over 60 percent of the FDI capital contribution to this province. This is attached to a wider gap of the University graduates who make use of the increased technological advancement and better management. It is therefore advisable for these regions to ensure an increased education acquisition to balance the ever changing technological advancement in order to realize a sound economic growth as capital returns are attached to the law of diminishing returns. Empirical results analysis This employs the use of regression analysis and uses the coefficient of the correlations to predict functional relationships amongst the presented variables. We therefore compute the correlation coefficient based on table1 below for the period 2001 to 2007 and see relate the impacts of FDI to economic growth and social development. Table 1 shows GDP of the three regions and the percentage Year. Central. North. South. S.% C.% N.% Region comparison (N. = 1) 00 4814.84 1613.81 1975.92 57.29 19.20 23.51 2.44/0.82/1 01 5446.25 1764.73 2186.94 57.95 18.78 23.27 2.49/0.81/1 02 6280.10 1950.86 2436.90 58.87 18.29 22.84 2.58/0.80/1 03 7821.58 2233.97 2715.81 61.24 17.49 21.25 2.88/0.82/1 04 9591.77 2719.39 3220.08 61.76 17.51 20.73 2.98/0.84/1 05 11417.34 3216.36 3610.76 62.58 17.63 19.79 3.16/0.89/1 06 13485.61 3860.78 4235.70 62.49 17.89 19.62 3.18/0.91/1 07 15931.09 4625.59 4976.23 62.39 18.12 19.49 3.20/0.93/1 08 18506.16 5477.62 5931.61 61.86 18.31 19.83 3.12/0.92/1 09 21154.19 6390.12 7196.89 60.89 18.39 20.72 2.94/0.89/1 Table 2 shows FDI absorption amount and percentage in separate regions. years Total South. central Northern South.% Cen.% N.% 2000 64.24 56.27 3.12 4.85 87.59 4.86 7.55 2001 71.21 62.27 3.96 4.98 87.44 5.56 7.00 2002 103.69 91.18 6.75 5.76 87.94 6.51 5.55 2003 158.02 133.75 15.15 9.12 84.64 9.59 5.77 2004 121.38 92.04 21.54 7.80 75.83 17.75 6.42 2005 131.80 98.68 25.14 7.98 74.87 19.07 6.06 2006 174.31 123.58 39.94 10.79 70.90 22.91 6.19 2007 218.91 147.97 47.43 23.51 67.59 21.67 10.74 2008 251.20 168.02 54.01 29.17 66.89 21.50 11.61 2009 253.23 174.14 44.69 34.40 68.77 17.65 13.58 Table Three Results of Correlation Analysis south Central North Pearson correlation 0.899 0.934 0.958 Coefficient 1.198 0.429 0.572 T value 5.818 7.403 9.489 R2 adjustment 0.785 0.857 0.908 Implication of the results From the empirical analysis as revealed by table of Correlation, table 3, the impact of FDI absorption is two-fold. On one half, it leads to the economic growth of the individual region with south ranked top. On the other half, it leads to increased regional imbalance revealed by major gap differentials. The Pearson correlations for south, central and northern regions are 0.899, 0.934 and 0.958 9 in that order. Analysis of the coefficient unearths the economic growth and as well as broad regional imbalances with the southern region attached to a figure of 1.198 implying the multiplier effect of FDI to GDP; a unit FDI absorbed leads to 1.198 unit logarithmic growth in Gross Domestic Product. There is a different in terms of the FDI absorption and this further explains the regional imbalance. A unit of FDI absorbed in northern region results into 0.572 rises in GDP and a unit absorbed in Central regions multiplies the GDP by 0.429. Based on this regression analysis, we could see a totally different scenario if the FDI’s absorption rate was uniform for the three regions. It is thus revealed that the southern region is the most beneficiary with over 65% proportion of the FDI inflow in Jiangsu with the northern region coming second. This unfolds into a massive regional disequilibrium which if unchecked empties into greater regional gulfs that is not good for the Jiangsu’s economy. The disequilibrium is hard to be offset in the short term and will remain stable for long time. Based on the existing gaps, the disequilibrium will further hurt the economy. Table 4 shows Number of university graduate (A) and intermedi- ate technicians (B) . Year South Central North A B A B B 2001 5.34 40.21 1.14 14.33 1.05 18.97 2002 8.03 41.23 1.05 14.69 1.95 23.62 2003 8.76 49.09 1.46 16.75 3.43 24.95 2004 13.47 51.39 2.36 17.94 3.92 26.27 2005 16.23 52.23 2.77 18.24 3.97 25.06 2006 18.50 59.48 2.97 25.53 4.26 28.26 2007 23.16 64.49 4.40 26.83 5.84 29.23 2008 29.56 65.67 5.06 24.15 6.48 30.32 2009 29.06 68.95 5.23 25.58 6.99 31.23 Executive summary The Foreign Direct Investment (FDI) impacts both negatively and positively on regional economic development. The paper utilizes the Gross Domestic Product (GDP) of the Jiangsu’s province as the benchmark to reveal its current state of development based on the comparisons of its three constituent regions. The paper further focuses on the mechanism adopted by the FDI to impact on these three regions. To this end, the paper answers two questions; i) how do FDI as a major means of promoting economic growth drive Jiangsu’s economic growth? ii) What are other FDI’s roles in the three major regions of Jiangsu? Based on the two questions, the paper further simplifies into three major objectives, as stated; i)FDI’s mechanisms of action on Jiangsu’s regional capital formation , ii) FDI’s mechanisms of action on Jiangsu’s regional technological advancement , and iii) FDI’s mechanisms of action on Jiangsu’s regional economic growth. The paper reveals that FDI impacts on the GDP through technological advancement which is assumed to be a fixed exogenous variable; the country will only develop if there is a rise in a technological advancement. On the hand, FDI impacts the GDP growth rate through capital formation. In this regard the amount of absorbed FDI per regions determines its magnitude of development. In regard to technological advancement, the FDI enhances regional development based on the availability of manpower. To this end, southern regions is seen as the most beneficiary based on higher level of University graduate resulting from higher number of higher learning institutions. The increased knowledge gained through the FDI has led better industrial management which has the multiplier effect on the GDP. However, domestic investment has suffered major setbacks resulting from the FDI and if not unchecked will render regional economy devastated. There is a need by these regions to put more emphasis on the FDI structures and not just its inflow. The paper calls for the higher share southern region to develop mechanisms to benefit from the FDI spillovers to attain self-competiveness. These will result to self-reliance and a long term and a stable economic development. The region is urged to utilize its University graduates to explore the opportunities presented by the FDI spillovers such as increased management and updating their industrial structures. In regard to the regression analysis, comparison of the regional correlation values as well as the coefficients figures, it is ascertained that southern regions has the lower Pearson correlation values of 0.899 and higher 1.198 coefficient. This indicates that a unit increase in FDI absorbed leads to 1.198 increases in GDP growth. Conclusion As revealed by the empirical analysis, the three regions have benefited from the FDI based on direct relationships between the GDP and FDI. We see an increased growth in GDP resulting from the capital formation effect of FDI as well as through increased industrial management resulting from technological advancement effect of FDI. This is further attached to increased advisory role of the FDI to these regions pegged at its ability to add knowledge to these regions through increased graduate effect. It is worth noting that for sound regional policies, we need to explore fully the use of FDI which translates to positive effects thus GDP growth which has a multiplier effect and hence increased economic performance. There is a call for the Chinese government to balance the coordination of Jiangsu’s regions in terms of development with more focus to the Northern and Central regions through sound policies making to eliminate the huge regional imbalance. Updating the Southern region industrial structure and consideration of the quality and structure of FDI as it is absorbed are the best policies attached to southern region in order to focus on its economic transformation and not just to let investment duplication form the center stage. The lagged central and northern regions should change strategies by recognizing that the gulfs recorded are as a result of completive advantage and thus put more emphasis on ways to close such gaps. They should more emphasis on absorbing the amount of FDI the blends well with their industrial and environmental characteristics; reorganize their industrial structure as well as exploring the opportunities presented in their developing coastal areas. The realization that FDI mechanism is an internal process as it incorporates foreign investment into local competitive entities in an attempt to enhance the Jiangsu’s economy, a region stands negatively affected if keenness is not considered on FDI inflow. This is because in the long run, domestic investment will be plunged and supplanted rendering a particular to surrender its autonomic economy and this is quite devastating to a sound development. The regions should aim at exploring the FDI spillovers through learning advanced technology, expertise management aimed at enchanting self-reliance. The Southern regions stands a better position to drive this self-competitiveness concept via its massive development and sound research and development influence; it can enhance FDI”s threshold to make education dynamic process hence steady flow of man power for regional development. A major strategy for the northern and central regions is to recognize the impacts of education in economic growth and development via exploring the mutual cooperation of the southern Jiangsu’s institutions and Universities. Reference Agarwal, M., & Centre for International Governance Innovation. (2009). Indias economic future: Education, technology, energy and environment. New Delhi: Social Science Press. Chen, C. (2011). Foreign Direct Investment in China: Location Determinants, Investor Differences and Economic Impacts. Cheltenham: Edward Elgar Pub. 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