The Impacts Of Foreign Direct Investment In China

3592 words - 15 pages

This assignment focuses on the impacts of foreign direct investment (FDI) in China. Inasmuch as this assignment will explore factors that make China an attractive FDI destination; it will also examine positive as well as negative impacts of FDI on the Chinese economy. Inclusive in this assignment will be an evaluation of positive and negative impacts of FDI on the economy of China, coupled with a discussion on corporate social responsibility (CSR).

UNCTAD (2003) defines FDI as

… an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy ([the] foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor... (UNCTAD 2003: 231).

While the above definition reflects on what FDI is; the justification for choosing to explore FDI in China is drawn from multiple studies that also explored FDI in China. Evidence from Shan, (2002) suggests that at provincial level, labour quality, market size, average wage, and level of infrastructural development make China attractive. A study that sought to explore FDI determinants, in Guangdong province of China using firm micro-level data Ng and Tuan (2003) found that quota effects, firm size and transaction costs were significant factors for locational choice by foreign investors. The justification for choosing China is also drawn from a research by Fung et al., (2002) which revealed that United States direct investments in China are influenced by local market demand, whereas Hong Kong investments in China are in influenced by labour costs.

Fundamentally, a discussion of FDI calls for consideration of globalization because economies are inextricably interwoven (Cuyvers et al., 2008). According to Feaver, (2009), the term “globalization” entails three systemic dimensions of economic integration: social convergence, political harmonization, and social change resulting with the end result being a large global market that is effective. The increase in globalization As globalization increases, the FDI has been considered as an important strategy for competition by Multinational Corporations (MNCs), and this has resulted to the spread of investments across the globe following the sharp processing of globalization after the World War II (Gilbert, 2012). As MNCs develop, the risks associated with FDI became more exposed due to enlargement of the market (Liu, 2011; Cuyvers et al., 2008). FDI plays a significant role in the development of Chinese economy in terms of opportunities offered through globalization (Venables & Yueh, 2006); Bitzenis, (2005) adds that the increases of FDI as observed from the last decade is a combined effect of global economic integration, improvement in transportation; technological advancement; and deregulation of the financial sector.

China has become the top recipient of foreign investment globally, with $53 billion foreign investment inflows (Chen et...

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