Economic growth of china

Introduction

This paper provides summarizes of FDI in China in the past decade until 2009, It describes the overview of the Economic growth, the sources and the benefits and costs to China and foreign companies. Moreover, the paper analyses the potential impact of China to compare with other countries.

This paper covers four main ideas: Firstly, there is the definition of FDI and how there are different between the direct and indirect investments. Secondly, to analyze the benefits that China will receive from FDI and case study of Hewlett-Packard. Next, how Economics’ China has been growing fast from 1999 to 2008 and how inflow FDI has effected to GDP growth. Finally, the last part is summary of benefit in China.

What is FDI??

The International Monetary Fund defines foreign direct investment (FDI) as an investment that allows an investor to have a significant voice in the management of an enterprise operating outside the investor’s own country. For example, General Motor decided to reduce the cost of production in United State; therefore, GM invested money to build new factory in different countries such as China, Thailand and Malaysia. However, the host country has to have an equity stake at least 10 per cent or more for the voting power of the operation in a foreign country.

There are two types of investments which are the direct investment such as bonds, stocks and buildings and the indirect investment such as new technologies, capital, processes, products, organizational technologies and management skills. Both investments have advantages to China’s Economic and foreign investors.

China has the population more than 1.3 billion people (1,330,044,605 as of mid-2008), and is the world’s largest number of the population. China has become the largest recipient of FDI in the third world, absorbing nearly half of total foreign investment in developing countries since 1992 (The Economist, 1999). Between 1999-2008, China had received the FDI inflows about US$ 58.52 billion which is equal to 7.32 per cent of direct investment with non-financial.

At the end of 1978, Deng Xiaoping who was Chinese communist leader had new policy opening its economy for foreign firms to increase investment (Kahal, 2001). The government policies were set up for new joint ventures in special Economic Zones (SEZs) in Xiamen, Guangdong, and Shenzhen and coastal cities such as Fujian, Beijing, and Shanghai. The government also offered special incentive policies for FDI in these SEZs. As Tian said ‘The significant of Deng’s policy initiatives is to make full use of market mechanisms, or re-link with the global market system, domestically as well as internationally’. From this result, China has become a new market for foreign investors to encourage FDI inflows. In 2008, as shown in figure 1, China has a high of FDI inflow about US$ 92.4 billion or about 23.5 per cent of Economic growth.

Non-Financial Foreign Direct Investment (FDI) Inflows between 1999-2008

General Economic and Financial Indicators between 1999-2008

(All figures are in billions of RMB or percent unless otherwise indicated)

How does China get the benefit from FDI?

To analyze the benefits of FDI into China; There are several opportunities for foreign invertors such as low cost and productivity of labour, natural resources and opening policy. China is the world’s largest population in the world and has a high level of labour with low salaries which can reduce the cost of production for foreign companies. In addition, this chance can create of employment opportunities and learn high technology skills. For example, Hewlett-Packard which was the first Sino-American high-tech joint venture in the China’s electronic industry built in June 1985 in China (Lou, 2000). HP offered a long-term partnership, to maintain in the four modernizations and technological transfer and invested US$6-$7 million a year in the research and development center to provide professional service and support for its clients in China (Lou, 2000). From this investment, local communities would have knowledge transfers, technology spillovers and inflow of the capital. Moreover, MNCs in China give more benefits and higher rates such as bonuses, salaries, wages, and insurances because they are larger and more productivity than domestic companies or small companies. FDI transfers high technology skills to Chinese for increasing quality of production methods.

How many of investment is Economic Growth?

During 1999-2008 periods, China’s FDI increased from US$ 40.3 billion to US$ 92.4 billion and the percentage of real GDP growth also become increasing from 7.6 per cent to 9 percent at the same time. However, the number of projects by foreign firms had dropped from 41,473 in 2005 to 27,514 in 2008 because of Economic crisis such as the Asian financial crisis, increasing fuel price and unemployment rate.

Top 10 Origins of Non-Financial FDI

FDI is significant element in China’s reform and economic growth. That’s mean inflow FDI increasing effect to the volume of GDP growth. In 2008, as shown in figure 3, Hong Kong that was the highest top 10 origins of non-financial FDI inflows, received the capital of investment from foreign enterprises about US$ 41 billion and gained more 48.1 per cent from last year (Cheng and Kwan, 2000; Gao, 2005).

Conclusion

China has become the largest market of FDI among developing countries because of opening trade policy’s Deng. It has been increasing of the capital inflow by foreign firms, even though economic world is slowly growth. Indeed, foreign investors bring the beneficial opportunity on China’s economy such as technology transfers, productivity spillovers, employment opportunities and Economic growth.

Reference

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Kahal, S. E. (2001), Business in Asia Pacific: text and cases, Oxford University Press, Oxford [England].

Luo, Y. (2000), Guanxi and business, World Scientific, Singapore.

Rosenberg, M. (2008), China Population The Population Growth of the World’s Largest Country. About.com Guide. Available from: http://geography.about.com/od/populationgeography/a/chinapopulation.htm [Accessed: December 10, 2009].

Tian, X. (1996), “China’s open door policy in development perspective”, Canadian Journal of Development Studies 17, vol. 1, pp. 75-95.