Foreign Direct Investment - Case Study Example

Why Were Export Push and FDI (Foreign Direct Investment) Important for China’s Sustainable Growth from the Late 1990s Onwards? How Does China Successfully Achieve Export-And FDI-Driven Growth? Table of Contents Introduction 3 Importance of Export Push and FDI (Foreign Direct Investment) for China’s Sustainable Growth from the Late 1990s Onwards 4 Trade and FDI Are Two Key Components of China’s Open-Door Policy 4 The Development of Trade and FDI under Economic Reforms 5 The Role of SEZ’s and Open Economic Zones in Stimulating Trade and FDI in China 6 The Conditions for the Success of FDI in Economic Growth 7 The Role of FDI in China’s Economic Growth 8 How Does China Successfully Achieve Export- And FDI-Driven Growth? 9 Reason behind China’s Production of Large Trade Surplus with the US and the EU 9 Key Reasons behind China’s Success in Attracting FDI to Help Its Economic Growth 10 Importance of SEZs and Open Cities for China’s Success in Its Export-Push and FDI-Driven Growth Strategy 11 ‘China’s Rise Is a Threat to the Continuing Prosperity of the Developed World’- A Critical Assessment 12 Conclusion 13 References 14 Introduction Exports can be termed as one of the key constituents for a nation’s progression towards economic stability and self-sustenance. It can be determined as a direct consequence of a nation’s focus on acceleration in the production activities. The composition and the features of exports are monitored with respect to the changes in the pattern of the production. In the developing and developed economies, the government indulges in various efforts in order to promote exports. The various methods being adopted by the government include weakening its currencies, adopting the trade policies and subsidising the preferred industries among others. In this respect, it can be ascertained that accelerated export rate ensures and encourages the economic growth. It has been further explained that in the export push strategy, it is necessary to have a favourable balanced trade. Within the periphery of this strategy, government in development based economies makes an intensive effort to endorse exports with an aim of encouraging growth of the economy. Foreign Direct Investment (FDI) is a form of capital transfer on the international purview, which had grown in China in between the years 1980s and 1990s. It is mainly defined as the cross-border expenditure for acquiring or expanding the corporate control pertaining to the productive assets. Regulating and executing FDI inflow polices assist in gaining advanced technologies, latest production and management competencies and consumer allegiance among others through exports. These facilities ensure the development of the countries by bringing about growth in their industrial output related to production. This in turn plays a critical role in facilitating a nation to incorporate export push strategy (Froot, 1993). China is one of the countries that has adopted the strategies of export push and FDI and has subsequently become successful in developing its economy to a market-based system. In accordance with the recent history of China especially from late 1990s onwards, it is revealed that the country has embarked upon a journey from being a closed economy to becoming the second largest country in terms of receiving global FDI (Dullien, 2004). With these considerations, the essay intends to discuss the importance of FDI and export push in the development sustainable growth in China’s economy. Apart from this, the essay also intends to delineate the various ways in which China successfully achieves export and FDI driven growth. Importance of Export Push and FDI (Foreign Direct Investment) for China’s Sustainable Growth from the Late 1990s Onwards It has been ascertained that Chinese economy witnessed a sea of change after the economic reform that took place in the late 1970s as well as the early part of 1980s. It paved the path for the economy to leverage the benefits such as FDI along with aiding it to play a prominent role in global economy through sustained focus on export based economy growth strategy. Subsequently, there were certain key decisions made during the mentioned economic reforms such as open-door policy that turned out to be a key success factor for the nation’s economic transformation. Trade and FDI Are Two Key Components of China’s Open-Door Policy China had achieved considerable growth in terms of economy during the period of 1980s. This period had witnessed certain major developments within China’s economy. The average growth rate for China’s economy was around the 9.5% during the period of 1980-1990. In accordance with the growth of China’s economy, it had adopted the open-door policy to achieve desired success. This particular policy had played a critical role in the reform witnessed within the Chinese economy. In order to facilitate the open-door policy, the Chinese government had created ‘special economic zones’ (SEZs) that are intended strictly to deal with the outside world in terms of trading. In this regard, there are certain special characteristics being practiced by SEZs. One of the characteristics of SEZs is that economic development is fostered by the foreign capital. Furthermore, SEZs strategy also fosters economic activities, which are executed according to the principles based on the market economy. Government operating with respect to the SEZ administers special regulating powers pertaining to the foreign trade (Wei, 1995). China adopted the strategy of ‘export promotion’ in the period of late 1990s that further proved to be a success for many of the Asian nations. China has further implemented the economic reforms along with open-door policy for promoting trade and gaining economic development. Moreover, it has been ascertained that export-oriented FDI mainly aims at the application of the particular and specific resources. Responsively, the use of the resources is conducted at a lower cost within the foreign countries (OECD, 2000). The Development of Trade and FDI under Economic Reforms It is determined that trade and FDI were the prior tools within the open door policy that had assisted in the development of the China’s economy especially in the phase of late 1990s. China had executed various economic reforms that had given a new height and success to the country. During the period of 1978 to 1984, the first economic reform within China was initiated in the field of agriculture. The new regulations related to reforms focused on the decollectivizing agriculture as well as laying emphasis on the ‘household-responsibility system’. This trend within the agricultural reform accelerated the living standard of the farmers. Apart from this, the agricultural reform also ensured the stimulation of the rural industry. During the period of the 1980s till present, China has assumed economic reforms in the fields of agriculture, industry, trade and foreign investment, services and government finances among others. In correspondence with industrial reforms in China, it has been executed for increasing the efficiency of the state-owned enterprise. In the view of China’s economy, it can be ascertained that it provides a unique opportunity to the other countries. This opportunity is mainly applied by the countries for exploring the institutional, political, economic and social forces for the development of the economy. In addition, it is observed that economic reforms paved the way for the subsequent development of trade and FDI as there were a greater amount of production in fields such as agriculture and other allied industries which could be used for the purpose of trade along with attracting FDI (Perkins, 2014; Fernández, n.d.) The Role of SEZ’s and Open Economic Zones in Stimulating Trade and FDI in China In accordance with facilitation of FDI within China, the government had established few special economic zones (SEZ) and the open economic zones. In this respect, these focused trading zones had been established outside the industrial centres of the state in order to prevent the impact of the Chinese heavy industries. With respect to fostering FDI and the export push strategy, the SEZ provides preferential tax along with administrative treatment pertaining to the foreign firms that are located within this area (Hayashi, 2003). SEZ has had a vital role to play in the China’s integration with the global economy. Correspondingly, it has been ascertained that SEZ as a part of an export oriented strategy has greatly influenced the Asian economies. On further note, SEZ and open economic zones implementation was associated with certain incentives. The concerned incentives include labour, land usage and taxation. This further ensures the proper execution of SEZ and open-economic zones for achieving economic development and growth. It is acknowledged that the labour capital of China is available at a low cost, which is a favourable condition for the foreign investors to locate their operations in SEZ. The geographic location of SEZ had also been planned in such as way so that it is nearer to the ports in order to have easy access to the availability of raw materials for processing and then shipping it to the foreign market. Therefore, SEZ can be has emerged as a key stimulator for the growth in FDI and trade in China (Paul, 2014; Yao & Zhang, 2003; Balasubramanyam & et.al., 1996). The Conditions for the Success of FDI in Economic Growth As observed after implementing the open-door policy, China’s gross domestic product (GDP) accelerated from 364.5 billion Yuan to the figure of 24,953 billion Yuan amid the periods of 1978-2007. This enormous growth of the GDP of China has essentially been owing to its adoption of the FDI strategy. There are various modes for the fostering effective FDI investments. The two vital modes of FDI investments entail export-oriented FDI and domestic-market-oriented FDI. Correspondingly, the FDI inflows represent the export of the manufactured and the finished products. This further ensures the reduction of the production costs by applying cheap labour costs. Moreover, the FDI inflow in case of domestic-market represents the expansion pertaining to the investment within the corporations. FDI inflow in the domestic market ensures the business expansions as well as acceleration of the multinational companies (Yao, 2006). The conditions or determinates of the FDI that ensure the economic growth and success have been discussed in this segment. Economic structure is one of the conditions, which is required in order to gain economic growth by applying FDI. It is assumed that the larger the market size of an economy, the higher will be the likelihood of it receiving enhanced FDI inflow. Apart from this, the country’s polices play a vital role in achieving success by applying FDI. China has reached a new height in formulation of polices with respect to the establishment of SEZs for the foreign investors. This condition was favourable for the success of FDI (Zilibotti, 2009). The Role of FDI in China’s Economic Growth In China’s economic development, FDI has laid a greater impact on GDP, economic transitions and exports. In keeping with the impact on GDP, it has been observed that FDI has contributed in generating taxation revenues, by deriving earnings with respect to the foreign enterprises and tariff rates that accelerated the government’s income. Furthermore, the other role or contributions of FDI include enhanced formation of capital along with capital accumulation. Subsequently, inward FDI accelerates the productivity pertaining to the host countries. It further increases the productivity to take it to the next level. Furthermore, FDI inflow also lays an impact on the trade regulations. FDI contribution has also facilitated to accelerate the manufacturing exports of China. Apart from this, it has been determined that the export promotion of China was the other key factor to attract high level of FDI. Considering all the above factors, it has been determined that FDI also lays a major impact on the economic transaction of a country. China’s FDI strategy has directed its economy towards the market-oriented domain. Subsequently, FDI contributed in diversifying the ownership structure, establishing market-oriented institutions, along with facilitation of economic reforms and completion among others, which ultimately resulted in the economic growth of China (Zilibotti, 2009). How Does China Successfully Achieve Export- And FDI-Driven Growth? Reason behind China’s Production of Large Trade Surplus with the US and the EU From the foregoing observation, it is determined that China’s export since the late 1990s has shown a sustainable rise on a continuous basis. China has absorbed the opportunity pertaining to the economic globalisation. The country has successfully participated in the global economic as well as industrial division related to labour. China endures a competitive advantage over other countries with respect to labour. In this context, it has been observed that China’s labourers are skilled workers and endure advanced technical skills. Apart from this, China’s labour force is available at a lower cost. Furthermore, apart from labour advantage, China also endures technology and industry advantage for gaining competitiveness over other countries. The available facilities within China have provided the country with a new height in achieving a large trade surplus in the context of the United States and the European Union (Yuan, 2014). In the year 2001, China had provided its consent to the World Trade Organisation (WTO) to indulge in trading activities. As observed, EU and China are the two major traders worldwide. In recent scenario, China is considered as the second largest trading partner with regard to the EU (European Commission, 2014). In accordance with Bloomberg News (2013), China has greatly surpassed the US and has become world’s largest trading nation (Bloomberg News, 2013). Key Reasons behind China’s Success in Attracting FDI to Help Its Economic Growth The strategy of foreign direct investment has assisted China in successfully achieving a sustainable economic growth. China’s latest economic reforms and the open-up strategies have encouraged the multinationals to explore the Chinese market. Correspondingly, China’s accelerating export growth rate is the result of the continuous increase in FDI. The investment opportunities are more in China; it is therefore determined that to leverage such prospect the foreign countries get attracted in mobilising the FDI inflow. Additionally, it has been ascertained that the inbound FDI is a vital factor in the development of the China’s economy along with increasing the export rate. The industries that facilitate accelerated FDI also have been witnessed to leverage higher productivity. Moreover, FDI acts as a catalyst for China and results in its economic growth. On further note, it has also been ascertained that the FDI policies implemented by China have evolved in the passing years thereby, strengthening the institutional capacity. China’s accelerated decentralised FDI creates opportunities and competiveness over other countries. These factors assist China in attracting FDI to assist its economic development (The World Bank Group, 2010). Importance of SEZs and Open Cities for China’s Success in Its Export-Push and FDI-Driven Growth Strategy It is deemed that the intention of the Chinese government behind the establishment of SEZs mainly includes gaining the advantage of the trade-friendly provinces i.e. Guangdong and Fujian. Apart from this, the government also considered the rigid economic structure, which was not possible to reframe. It has been assumed that the trade policy with regard to the tariff rate is considered as an effective and most important policy related to foreign investment. In this regard, it can be further determined that SEZs were traditionally established by China as an open market within the economy that was greatly controlled by the exchange regulations and the distortionary trade. As observed, the establishment of SEZs has created conducive environment for the promotion of foreign investments as well as accelerated exports. SEZs are essentially the economic principles that dominate the liberal trade market. The basic reasons behind the success of SEZs implementation in China have been explained in this segment. The presence of unique location has made the policies and the implementation of SEZs more effective. The greater focus of government on trade provided the country an improved and well-structured infrastructure. Consequently, availability of trade-friendly provinces and flexible laws among others were the primary reasons for China’s success with regard to export-push and FDI-driven growth strategy (Yao & Wei, 2006; Mukherjee, n.d.). ‘China’s Rise Is a Threat to the Continuing Prosperity of the Developed World’- A Critical Assessment ‘China’s rise’ has become a concern for the developed world especially America because of the country’s hegemonic status. China’s status is being associated with the world politics and the incompatibility of China with respect to the system of the western value. China’s economic growth is heading towards making the country the world super power in the upcoming years. In this respect, the ideological orientation pertaining to China makes it a revolutionary power that is becoming a threat to global structure. There are few factors that prove China as a threat to the global structure. Ideological along with cultural factors are positioning China as a threat. Besides, geopolitical and geo-economic factors also depict China as a threat to the continuing rise of prosperity of the developed world. On the contrary to the aforementioned factors that project China as a threat, there are factors that depict ‘China a peaceful rise’. Establishment of strategic partnership with second-tier power nations and promotion of good-neighbour policy among others are a few factors that discard the notion that China is a threat to the global structure (Blomstrom & Sjoholm, 1998; Xia, n.d.). Conclusion In accordance with the foregoing essay, it has been determined that FDI and export push strategy were the key constitutes of China’s open-door policy to facilitated to attract investors and other leading nations to engage in export activities with China. Moreover, the focus on developing the SEZs with the purpose of drawing multinationals to establish their operations in China has been the key success factor behind the rise in FDI and foreign trade. With the ensuing growth and development in China from the period of late 1990s particularly because of significant economic reforms, it has emerged as amid the top three economies in the global context in the present scenario from being a closed economy. The consequence of such transformation has been the rise in the threat of China as an economic superpower amid the leading developed economies such as United States. References Blomstrom, M. & Sjoholm, F., 1998. Technology Transfer And Spillovers: Does Local Participation With Multinationals Matter. National Bureau of Economic Research, pp. 1-15. Bloomberg News, 2013. China Eclipses U.S. as Biggest Trading Nation. News. [Online] Available at: http://www.bloomberg.com/news/2013-02-09/china-passes-u-s-to-become-the-world-s-biggest-trading-nation.html [Accessed March 21, 2014]. Balasubramanyam, V. N. & et. al., 1996. Foreign Direct Investment and Growth in EP and IS Countries. Economic Journal, Vol. 106, pp. 92-105. Dullien, S., 2004. 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