Effect of FDI on Employment and Economic Growth in China - Dissertation Example

? The Effect of FDI on Employment and Economic Growth in China Executive Summary China tends to emerge as a global economic power through the rise inactivities like exports mainly of its manufacturing products and also through the imports of raw materials from foreign nations. The country earns the attraction of potential foreign investors owing to the incidence of cheap human resources with potential resource base. Foreign Direct Investment thereby gains an entry into the region mainly through the events like mergers and acquisitions or through the foreign trade earned from export activities. The paper relating to the above clause tends to infer whether the large volumes of foreign trade gained by the country making it second to United States suits well for the country in terms of contributing to the rise of economic growth or through enhancement in the employment level. Mainly secondary research in the form of books and journals are reviewed in the process of gaining effective inferences to the research questions. Contents Contents 3 Aims and Objectives 5 Aims 5 Objectives 5 Approach 6 Literature Review 7 General Understandings 7 Foreign Direct Investment 7 Relation between Foreign Direct Investment and Economic Growth 7 Relation between Foreign Direct Investment and Employment 8 Foreign Direct Investment in China 9 General Positive Impacts of Foreign Direct Investment on China 9 General Negative Impacts of Foreign Direct Investment on China 9 Foreign Direct Investment and Economic Growth in China 10 Positive Impacts 10 Negative Impacts 12 Foreign Direct Investment and Employment Situation in China 12 Positive Impacts 12 Negative Impacts 13 Critical Evaluation and Analysis of the Data 14 Foreign Direct Investment and Economic Growth in China 14 Positive Impacts 14 Negative Impacts 19 Foreign Direct Investment and Employment Scenario in China 20 Discussion 27 Conclusion 29 References 30 Bibliography 36 Aims and Objectives The Aims and Objectives of the paper can be underlined as follows. Aims The main aim of the report is to understand the impacts of the entry of Foreign Direct Investment on the Employment Scenario and the Economic Growth parameters of China. Herein the paper would endeavour to reflect on both the positive and negative impacts that the entry of Foreign Direct Investment had on the country focusing more on the stated parameters. Objectives The first objective of the report is to evaluate the impacts of Foreign Direct Investment on the Employment scenario and patterns in the Chinese region whether contributing to social development or leading to social deprivation of the common masses. Secondly the report endeavours to understand the potential impacts of Foreign Direct Investment on enhancing or disturbing the economic potential and growth tendency of the Chinese region. Statistical reflections made from a number of government and other authentic sources would help in gaining an effective understanding. In whole the paper through the use of secondary resources in the form of books, journals and other authentic newspaper articles would endeavour to reflect on both the positive and negative impacts of the entry of Foreign Direct Investment on the Republic of China. Approach The Project would be approached through the gaining of secondary data from a large number of authentic sources pertaining to books, journals and other articles gained from online newspapers. Use of authentic data sources available on the internet contributes on the gaining of relevant information in an authentic and faster fashion. Further the use of secondary research methods also helps the researcher in saving considerable amount of research cost, time and energy that had been largely expended in cases of primary research where survey is required through the incorporation of a third party agency. The survey to be conducted through the designing of questionnaire to be used for conducting an interview on the sample population would require the use of larger time, cost and energy for the researcher than in the case of secondary research. Information gained from secondary research also serves as a potential platform for conducting of future primary research activities on the topic or issue held. The use of secondary research also helps the researcher to gain a study of the topic or issue concerned from different angles to gain a more enhanced and in-depth understanding of the same based on authentic and reliable data sources (Kumar, 2011, p.58-60; Hulley, 2007, p.207) . The approach of the project would also deal with the presentation of a Gantt chart that would reflect on the different time scales for the different set of activities related to the designing of the research paper to help in the gaining of needful inferences. The Gantt chart prepared on excel would highlight the different activities and apparent time scales that would be required for effective addressing of the same in the course of the research carried out. The Gantt chart for the paper can be rendered as follows. Literature Review General Understandings Foreign Direct Investment Neuhaus (2006) draws in the view rendered by OECD that reflects the interests of a foreign institutional investor in opening up a production facility in another cross country location or the purchasing of considerable amount of equity holdings of a company located in the different nation contributes in the entry of foreign investment in the latter location. These two strategies are taken into consideration by the foreign investor so as to build potential and long-lasting relationship with the government and trade authorities of the latter economy (Neuhaus, 2006, p.42). Relation between Foreign Direct Investment and Economic Growth Neuhaus (2006) further observes that the prior models endeavouring to evaluate the impact of foreign investment on the economy like that of Brems were neo-classical in nature such that it tended to reflect on the contribution of such to capital accumulation in the latter region without any significant impact on the growth factor. In contrast the author argues that the current models tend to draw effective focus on the relationship between foreign direct investment and the technological growth of the nations that in turn contribute to the development of the economic situation at a later period. Foreign Direct Investment is found to significantly contribute to the economic growth of a nation both through Direct and Indirect channels. These two channels are referred by the author to contribute in a dual fashion in terms of accumulation of capital and transfer of technical knowhow to thereby help in the holistic growth of the economy through enhancing the productive potential of the state. Among the two Foreign Investment transition models like Direct and Indirect, the ‘Direct Transmission’ model is rendered larger importance than that of ‘Indirect Transmission’ for the former is taken to render ‘Greenfield Investment’ or that which promotes the growth and development of the technological and economic potential. ‘Indirect Transmission’ model rather rests on the participation factor of the foreign investor through the gaining of ownership of equity holdings that in turn fails to render significant potential on the growth factor (Neuhaus, 2006, p.45-46). Relation between Foreign Direct Investment and Employment Mossa (2002) observes that investments gained by a region from a foreign source tend to render different types of impacts on the employment patterns. The author states that foreign investments gained in contributing to the growth of production and distribution networks in the given region would amount to the growth of significant amount of employment. Again it is held that through the process of ownership gains stimulated by the introduction of foreign investments in the form of acquisitions and business restructuring programs the process would contribute to enhancement and sustainment of employment in the region. However in the third case it is also held that gaining of foreign direct investment by the region could also amount to the rise in events like closure and divestment of existing firms thereby rendering a negative impact on employment (Moosa, 2002, p.77). Foreign Direct Investment in China Lau and Bruton (2008) observe that China gained the first source of foreign direct investment owing to its joint venture with Russian firms. China tends to attract considerable amount of foreign direct investment owing to the spontaneous growth in both the Gross Domestic Product and Trade patterns recording an average annual increase of 9 and 15 percent respectively from the period ranging 1978 to 2004. Other than joint ventures the region gains foreign direct investment through methods of acquisitions by foreign firms where a larger part of such investment is gained from regions like Taiwan, Hong Kong, Macau and Singapore other than western nations. The larger part of such investment as noted by the authors is gained by regions relating to significant ports and other Special Economic Zones (Lau and Bruton, 2008, p.30-33). General Positive Impacts of Foreign Direct Investment on China Yang, Wu and Lin (2010) state that the major amount of foreign direct investment of around 60 percent in China is gained by sectors focusing largely on the activities of innovation and research and development. The gaining of large scale foreign direct investments contributes in the enhancement of the potency of the Taiwanese firms in China to gain on labour and technological productivity and also to reduce cost (Yang, Wu and Lin, 2010, p.538-539). General Negative Impacts of Foreign Direct Investment on China Cole, Elliott and Zhang (2011) infer to this end that China has become one of the most attractive quarters inviting potential amount of foreign direct investment from other nations of the world. During 2005 the region happened to gain a considerable amount of foreign direct investment of around $72 billion that ranked the region as third in terms of global statistics of foreign investment recipients. However where such foreign investments contribute in the development of industrial and social infrastructures the same is also found to enhance the impacts of environmental pollution pertaining to air, water and soil in the region. Enhanced industrial growth leads to the increase in the spread of greenhouse gases in the region which thereby turns harmful to life and property (Cole, Elliott and Zhang, 2011, p.121-123). Foreign Direct Investment and Economic Growth in China Positive Impacts Vu, Gangnes and Noy (2008) observe that the manufacturing sector in the Chinese economy tends to be the largest sector welcoming the inflow of foreign direct investment of around 60 percent while the real estate sector accounts for around 11 percent of the total inflow of foreign funds. However the distribution of foreign investment in all the different sectors of the Chinese economy is observed to take a heterogynous outlook as reflected from the following tabular representation (Vu, Gangnes and Noy, 2008, p.543-544). Figure 1 (Vu, Gangnes and Noy, 2008, p.544) Esq, Chen and Sun (2010) further observe that the rate of inflow of foreign direct investment into the Chinese region worked out to render growth in economic and the trade variables in the country. A report rendered by Xinhua New Report agency reflects that from the time period ranging from 1979 to 2008 the average annual rate of economic growth for the country ranged around 9.8 percent in comparison to the global average of 3 percent. The authors noted that the rise in the rate of foreign capital entry into the Chinese market triggered the rate of economic growth in the country that in turn contributed in attraction of larger amount of foreign capital investments in other domestic sectors of the Chinese economy (Esq, Chen and Sun, 2010, p.1, and 8). Negative Impacts Chang (2012) specifically relates to five main negative impacts or threats that the growth of foreign direct investments tend to have on the economic growth of China. The first threat relates to the need for the increased presence of China’s official currency (RMB) in different offshore markets with whom the region endeavours to enhance its trade practices. Absence of significant volumes of RMB in offshore foreign markets leads the region to depend on the position of foreign currencies that leads to the rise of chances for fiscal liquidity. Similarly the second risk related to the issue of increasing amount of foreign trade activities and surplus of foreign investments is the threat of rising credit for China. The third risk factor relates to the undue speculation of the Chinese currency in the global markets thereby leading to a rise in the inflow of above average level of foreign investments on a continual basis. This surplus amount of investments termed as ‘Hot Money’ finds its way out in enhancing the growth of criminal activities in the region. Fourthly there rises undue competition between the international hubs attracting foreign investments such that the same leads to rise in potential confusion in times of urgency. Finally in the fifth case the event of spontaneous appreciation of the RMB in foreign markets is also held to create a potential problem for the region in augmenting the level of dollar reserves (Chang, 2012, p.73-79). Foreign Direct Investment and Employment Situation in China Positive Impacts Karlsson et al (2009) observe that the gaining of foreign direct investments enhanced the employment patterns for the private owned firms both at the domestic and international level than that of non-private companies pertaining to both categories domestic or otherwise. Statistics presented along two periods by the authors reflect that for the period tending from 1998 to 2001 the labour forces considerably reduced by around 14 percent and for the period ranging from 2001 to 2004 the same declined by around 17 percent for the non-private owned domestic firms in China. Again for the international non-private firms the labour force declined in the first period with only a small level of rise in the second period. However the situation was just the contrary for private domestic owned firms where labour force gained an increase of around 19 percent during the 1998 to 2001 period. Labour force for the international private owned firms gained a huge hike of around 24 percent in the period ranging from 2001 to 2004. The above event is attributed not only to the fact of rising job opportunities in the international corporations but also activities like mergers and acquisitions thereby usurping the labour force involved in the non-private enterprises. Thus entry of foreign investments in China is found to render an increase in the employment levels of private enterprises in both the domestic and international context (Karlsson et al, 2009, p.184). Negative Impacts Braunstein and Brenner (2007) states that the continual flow of foreign investment in China happens to render inequality in the system of wage distribution relating to men and women operating in different industries and regions. It is noted that wage differences are created in where women tend to gain a larger wage than men while working in sectors and regions gaining a larger inflow of foreign direct investments. This situation that gained evidence during 1995 earned a reverse trend during 2002 reflecting a rise on wage differentials related to gender dynamics (Braunstein and Brenner, 2007, p.214-215). Critical Evaluation and Analysis of the Data Foreign Direct Investment and Economic Growth in China Positive Impacts The growth of entry of Foreign Direct Investment (FDI) in China gained huge momentum after the period of 1990s. After this period the range of foreign investments that entered the region spread along from the coastal areas to the other interior regions reflecting a rise from $100 million during 1979 to around $40 billion by the close of 1995. Relating to the growth of Foreign Direct Investment in the region the simultaneous growth of the Gross Domestic Product (GDP) can be understood from the rise in the ratio of FDI and GDP such that the ratio is found to rise from 3 percent during 1992 to around 5 percent between the periods ranging from 1994 to 1997. The absorption of Foreign Direct Investment to contribute to the economic growth of China gained sufficient momentum owing to the favourable policies of the government to promote development in agriculture and industries related to telecommunications, transportation, energy and high-technology bases (Hale and Long, 2011, p.408-409; Kotrajaras, Tubtimtong and Wiboonchutikula, 2011, p.183-184). The above situation can be further reflected through the presentation of a graphical analysis reflecting both the growth in FDI and FDI/GDP ratio along the stated periods in China. Figure 2 (Hale and Long, 2011, p.409) The economic growth of China depending on the enhancement of entry of foreign direct investment to the country can also be analysed based on the mutual bi-lateral trade agreements between the Chinese region and other nations belonging to the Latin American and Caribbean (LAC) context. It is observed that the demand for primary commodities or raw materials is continually growing in China from the other LAC nations that in turn contributes to the economic growth of the region. Moreover another course of observation relates that the rate of exports by China in the global markets is tending to render a threat to the export parameters for nations belonging to the LAC and other Mexican regions. Demand for raw materials and services gained from other countries based on international trade agreements help in the augmenting of economic growth for the region of China. The growth of the Gross Domestic Product in China from the period ranging from 2000 to 2004 gains enhanced relation to the growth of exports from LAC countries after the 2004 period. This situation can be graphically represented through the presentation of the following chart reflecting Trade situation between LAC Countries and China from the period ranging from 1993 to 2005. Figure 3 (Gallagher and Porzecanski, 2008, p.188) The first two columns in the chart reflect the rise in the level of export activity of the different LAC Nations to China wherein the last two columns relate to the analysis made by World Bank on such basis. Moreover the increased penetration of China into the global trade market pertaining to imports is reflected in the following chart that causes a concern for the economic performance of the LAC Nations (Gallagher and Porzecanski, 2008, p.187-194; Harris, Robertson and Xu, 2011, p.1703-1704). Figure 4 (Gallagher and Porzecanski, 2008, p.194) The above analysis clearly reflects the growing presence of China in the global trade markets for goods and services contributing to capital and resource accumulation in the region thereby helping in economic growth. The lifting of restrictions by the Chinese government to encourage the growth of Foreign Direct Investment in the region led to the significant rise in statistics from $193 billion during the period of 2000 to around $378 billion pertaining to the 2008 period. Moreover the average annual rate of growth of inflow of foreign direct investment from the period ranging from 1990-2000 to 2008 increased from around $30 billion to around $108 billion. The above growth of the entry of foreign direct investment in the region culminated to the increased presence of a large number of Multinational Corporations in China resulting in economic growth. This rise in the level of Foreign Direct Investment in the Chinese region is held to contribute to the average annual economic growth of around 10 percent till 2008. Economic growth in China further related to the development of the social and economic situation of the Chinese consumers through the mode of urban development activities and the rise in the parameter of disposable income. These parameters taken into consideration further resulted in the development of the economic condition of China (Williams, 2009, p.128-131; Clark and Monk, 2011, p.101-103). The above fact relating to the growth of Foreign Direct Investment to the Chinese region from the period ranging from 1990 to 2008 is reflected in the following tabular representation. Figure 5 (Williams, 2009, p.131) Negative Impacts The rate of economic growth in China gains avid relation to the development of manufacturing industries in different coastal regions along with other special economic zones in the country. However such huge expansion of manufacturing opportunities in the Chinese region is found to contribute to the rise of significant amount of gender inequalities. A statistics revealed during 2001 reflects that around 84-91 percent of the working population related to the state owned cotton mills in China that contributed to the growth of exports was constituted by cheap women labourers. This fact reflects the practice of gender segregation and inequality being practiced in the production quarters of China (Shu, Zhu and Zhang, 2007, p.1308; Sun, 2010, p.289-291). The negative impacts of significant economic development in the Chinese region owing to the spontaneous inflow of Foreign Direct Investment in the country relates to the rise in the rate of savings that in turn signifies to the reduction in the rate of consumption activities. During 2007 the rate of savings for the household, corporate and government sector measured 22, 18 and 10 percent making total saving to be 50 percent of the Gross Domestic Product of China. On the contrary the rate of consumption fell below the global average of 65 percent to a figure of only 36 percent during 2007 as around 50 percent during 1992. This fact thereby largely relates to the rampant inequality in the field of effective income distribution in the country. Evidence of inequality in the distribution of income gained from manufacturing and export operations can be had from the rise in the Gini coefficient from 0.32 to around 0.50 along the periods 1978 and 2006 respectively. Moreover the inequality was also noticed in the attribution of gross domestic product gained in the Chinese region to the labour market that largely dropped from 57 percent to 37 percent relating to the periods of 1978 and 2005 respectively (Hui and Ee, 2011, p.219-221; Kim, 2011, p.64-65). The statistical chart related to the growth in savings pertaining to the Chinese region can be rendered as follows. Figure 6 (Hui and Ee, 2011, p.220) Foreign Direct Investment and Employment Scenario in China The rise in the proportion of foreign direct investment in China is found to generate the rise of capital intensive industries that would operate based on enhanced innovation and less dependence on the labour factor. Thus wherein a rise in the considerable amount of foreign direct investment led to the rise in the amount of capital formation for the state owned enterprises the same also relates to the reduction in the amount of labour forces related to such. Statistical data gained reflects that where the rate of capital formation gained significant height of around 575 percent from the period ranging from 1980 to 2000 amounting to RMB 1,650 billion the rate of employment failed to gain such significant rises. On the contrary it is observed that the number of employees increased by around 40 percent from 75 to 113 million during the period of 1978-1995 while reflecting a declining trend after the 1996 period (Fu and Balasubramanyam, 2005, p.611-612; Mucchielli and Yu, 2011, p.431-432). The same can be reflected through the use of the following graph. Figure 7 (Fu and Balasubramanyam, 2005, p.612) Again the flow of outwardly investments from regional quarters like Taiwan to China in the pattern of foreign direct investments is found to contribute to the growth of capital formation resulting in the rise of capital and technological intensive work sectors. With the rise in the demand for skilled and technological intensive labour forces owing to the development of industrial fronts like information and computer technology industries, China is thereby found to significantly suffer from the considerable rise in the amount of unemployment pertaining to a given period. Thus from the period ranging from 1995 to 2005 where the rate of foreign investment to China is noted to gain a gradual rise the same period also reflects a gradual slump in the rate of employment (Driffield and Chiang, 2009, p.20-22; Wang and Gunderson, 2011, 396-397). The same can be reflected through the use of the following graph. Figure 8 (Driffield and Chiang, 2009, p.20) It is further observed that the considerable amount of foreign direct investment gained in by China fails to render needed growth in the employment patterns in the country. Rather the rise in the capital gains by the country renders a rise in the level of unemployment in the Chinese region. The discrepancies in the rate of foreign direct investment and the rise in the unemployment trends in China are better reflected from the following two graphs. Figure 9 (Liang, 2007, p.23) Figure 10 (Liang, 2007, p.25) Further statistical data gained reflects that the enterprises running on foreign investments and private concerns tend to contribute to the growth of unemployment in China than compared to other State Owned and Urban Collectively Owned concerns. Diminishing amounts of employment trends along the period ranging from 1989 to 2003 along the different types of concerns operating in China is reflected through the following graph. Figure 11: Employment Contributions by the Different types of Concerns FIE = foreign-invested enterprise; SOE = state-owned enterprise; UCOE = Urban collectively owned enterprise (Liang, 2007, p.26) Another presentation rendered below also reflects the small percentage share of Enterprises running on Foreign Investment to Employment than on total amount of trade conducted in the region of China. The comparison is held for a period ranging from 1989 to 2003. Figure 12 FDI = foreign direct investment; FIE = foreign-invested enterprise; GDP = Gross domestic product; GFCF = gross fixed capital formation (Liang, 2007, p.27) The major cause attributed by analysts relating to the above condition is that the larger gamut of foreign direct investment enters the Chinese region through the considerable increase in the amount of mergers and acquisitions carried out by foreign firms. Owing to the above fact a significant portion of such foreign investments becomes related to the increase in the balance of payments for the country thereby failing to render changes or improvements in the employment scenario of the country (Liang, 2007, p.22-27; Shuifa, et al, 2011, p.136-137). Discussion It is observed that China tends to have become the second largest recipient of foreign direct investments after United States with a larger concentration of such rendered to the development of coastal areas and also of other special economic zones in the region. During 1998 the region gained a large portion of foreign investments that reached a peak of $45.46 million. This figure after a few turnarounds again reached a historical height during 2004 when it amounted to a figure of $60.63 million (Fung, Pei and Zhang, 2006, p.65-68). However unfortunately the significant amount of foreign investment gained in by the country fails to be duly proportioned leading to growing inequality in its distribution scenario. Statistics reflect that by the close of 2005 around 87 percent of the total stocks held in by the coastal regions of China were attributed to the uneven distribution in foreign investments gained. This rise in the growing inequality in the distribution of foreign investments in the Chinese region reflected considerable impacts on the economic performance of the region and also in the absorption criteria of the existing labour forces to render due productivity (Fu, 2008, p.93; Wang and Yu, 2007, p.397-398). The gaining of significant amount of foreign direct investments by China is observed to gain due momentum through the rise in the mergers and acquisition activities that tended to absorb the smaller firms operating in the Chinese region. Acquiring these firms by the entering multinational corporations helped the region gain considerable potential related to innovation, productivity and development of regional production networks in the Chinese landscape. The above activity resulted in the rise in the level of capital accumulation by the country thereby transforming its feature to become an emerging superpower (Henderson and Nadvi, 2011, p.286-288; Wei and Liu, 2001, p.1-3). The opening up of the Chinese economy to the external world to help attract large scale foreign investment through the presentation of its effective resource base coupled with the existence of cheap manpower also invited potential shortcomings. It was evident that such endeavour would lead China to move under foreign control where owing to the presence of weak legislations pertaining to intellectual property the multinational corporations triggered on getting the advantage of harnessing such for self use. Moreover the region being largely dependent on exports to earn the bulk of foreign trade also succumbed to the fear of a fall in the value of the American Dollar. A fall in the value of the Dollar would signify a rise in the value of the Chinese RMB which would then create increased pressure on the manufacturing industries in the region contributing to export trade. This rise in the pressure in such firms would thereby lead to the rise in large scale retrenchment leading to a rise in the unemployment level of the country (Taylor, 2011, p.404-405; Xiaojuan, 2004, p.1-3). Again the over dependence on export activities for the region of China surpassing the volume of imports results in the gaining of huge surplus in terms of its Current Account. However owing to the emergence of the financial crisis the current account surplus level of the country was badly hit to shrink leading to a financial meltdown in the region. Moreover the presence of unequal distribution of income along the country resulting in high amount of savings in the hands of few also contributes to the rise and sustenance of disparity along the region (Dew and Martin, 2011, p.52-54; Song and Woo, 2008, p.13-16). In terms of employment it is observed that the increased incidence of foreign direct investment in the country failed to generate needed volume of employment to support the cause of such welcomed entry. Foreign Investment mainly entered the Chinese region through the mode of mergers and acquisitions without rendering any development in the productivity scenario. Specialised skill sets along with the rise in the capitalistic and technological framework of the country resulted in the reduction of large scale employment thereby leading rise to job reduction in the region. This situation was more evident for the enterprises run by foreign investment rather than the state run holdings (Tsai, 2012, p.306-307; Wei and Balasubramanium, 2004, p.29-32). Conclusion China one of the largest population holding regions of the world reflects a growing attractive site for foreign institutional investors to render large scale investments. The region holding a huge abundance of cheap labour forces coupled with potential resources eyes the view of such potential investors that tend to gain effective entry through the mode of mergers and acquisitions. Moreover with the ascension to global bodies like World Trade Organisation the economy of the region has opened up leading to increase in the activity of imports and exports. All these events leading to a rise in the foreign investment reserves and potential of the region also fetch considerable fear in the form of increased external control. China with its weak legislative climate faces increased threat of loss of intellectual property to external hands. Similarly enhanced dependence on exports also creates threat for the region firstly through a huge surplus in the current account and secondly in a fall in the value for the American Dollar. The rise in the events like global economic and financial recession generates mayhem for the region leading to a rise in the unemployment levels in the country. References Braunstein, E., and Brenner, M., 2007. Foreign Direct Investment and Gendered Wages In Urban China. Feminist Economics, 13(3 – 4), pp. 213 – 237. Available through: EBSCO Database. [Accessed November 20, 2012]. Clark, G. L., and Monk, A. H. B., 2011. 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