Foreign Direct Investment and China`s Economic Development

Abstract

In the spectacular growth of foreign direct investment (FDI) in China during the 1990s, the East Asian newly industrialized economies (NIEs) have played a central role. This paper examines the characteristics, causes, and economic consequences of FDI in China’s economic transformation and development. Based on a study of available empirical evidence, the paper argues that the dominance of NIEs over developed countries in FDI in China has been due to the FDI of NIEs being less sensitive to institutional barriers in China, their greater sensitivity to the relatively low Chinese labour and land costs, their geographic proximity to China, and their responsiveness to the rise in per capita income during China’s early years of reform. At a time when FDI from developed countries has shown a relative sluggishness, the massive FDI of NIEs in the 1990s has facilitated China’s transformation into a robust export-oriented economy and its emergence as a global manufacturing base for labour-intensive products and production processes.