Foreign Direct Investment and Industrial Restructuring in Xiamen

Abstract

To accelerate local industrial transformation, the Xiamen authorities have decided to use foreign direct investment (FDI) to facilitate the restructuring of local old enterprises. However, the reform has been plagued by three main problems. First, the electronics industry has had little economic and technological linkage with other industries, and hence has been unable to function as a “leading industry” to stimulate technological transformation. Second, most of the foreign-invested enterprises (FIEs) have been engaged in an enclave type of export-processing operations and hence have yet to be integrated into the local economy. Third, the generally small scale and high labor intensity of the FIEs have further restricted their impact on local industrial restructuring. These problems indicate that the strategy of using FDI to facilitate local industrial restructuring is, for the moment, unfeasible, and highlights the importance of having a correct understanding of the nature and characteristics of FDI projects in developing countries and hence a realistic expectation of FDI’s role.