The Influence of FDI Upon The Development of Chinese Industry : A Case Study

ABSTRACT

China's great success in attracting large amounts of FDI and developing its export industry has made it the center of global attention. Now, as foreign multinationals become more internalized in their technology transfers, China is threatening to shift toward a selective FDI policy in which it will seek to improve the benefits derived from technology transfer by limiting the volume, and freedom, of FDI. But what is the basis for such a selective FDI policy? What kind of benefits are current FDI projects actually yielding for the Chinese economy? This report attempts to find an empirical answer to this question through case studies of both highly evaluated FDI projects and poorly evaluated FDI projects, or investments that many believe have rendered negative results. The cases were chosen from 1) the handheld device industry, 2) the automobile industry, 3) the retail industry, and 4) the banking services industry. These industries were selected because of their importance to the Chinese economy, because they exhibit a high level of foreign penetration, and finally because the assessment of FDI in each of these industries has fallen both ways.

The study found that FDI had the following positive influences upon the industries and the Chinese economy overall: in addition to the influx of investment capital, FDI 1) expanded exports, 2) diffused technology, 3) cultivated local suppliers, 4) increased employment, 5) reformed corporate administration and improved the management layer, and 6) promoted competition. Though there were some negative effects, they were scattered and small compared to these much larger positive effects. This report thus concludes that China should not restrict its FDI market but should seek to improve technology transfer benefits in other ways that are compatible with a liberalized market.

The policy makers of developing countries can draw some lessons from China's experience up until now: 1) the priority for those countries that are at an early stage of development should be the expansion of FDI volume, 2) developing countries that are past the initial stage of development must begin to focus on ways to improve the benefits of technology transfers that accompany FDI, but in ways that would not restrict FDI itself, 3) all developing countries should pursue a policy whereby local business cultivation is linked up with FDI utilization, 4) developing countries should remain committed to making the system of incentives more efficient, 5) developing countries should promote the liberalization of the service industry, and 6) developing countries should, at the same time, promote a set of policies that would keep the crowding out effect to a necessary minimum.