The impact of direct foreign investment on manufactured exports from China, 1979 - 1990

Abstract

Since the initiation of economic reform in 1979, the Chine e government has made a considerable effort to formulate direct foreign investment policies that would encourage investment inflow . Direct foreign investment flow to China have consisted of informal investment by Overseas Chinese (mainly from Hong Kong, Macau and Taiwan) a well a formal investment by Oversea Chinese and transnational firm from the rest of the world. The former flows , although almost certainly larger than the latter, particularly in production for export, are only partially, if at all, reflected in the data released by the Chinese government. The common form of informal direct foreign investment are compensation trade, processing, assembling and leasing of equipment, which contributed more to China' exports than formal direct foreign investment including equity joint venture , contractual joint venture , cooperative development and wholly-foreign-owned enterprise . Because of the lack of information about informal flow, this study, however, only focuses on the formal investment flow . Formal direct investment flow have not yet met China' expectation , particularly with respect to the sectoral distribution of incoming investment, the transfer of appropriate technology and export orientation. The growth of industrial output, import-substitution measure , the rate of return on investment in manufactured exports and export performance were examined to identify the determinant of direct foreign investment in manufacturing in China. Special attention was given to import-substitution measure which induced investment inflow into protected industries. The sectoral concentration of direct foreign investment in manufacturing ha been strongly correlated to import substitution incentive . Most direct foreign investment, particularly that from Japan , was in protected manufacturing sectors. The technological effect of direct foreign investment were measured in major industries in the Xiamen Special Economic Zone. An attempt was made to ascertain the relationship between the rate of technical change, the choice of technique and the flow of direct foreign investment in manufactured export in state-owned compared with collectively-owned enterprises. Direct foreign investment appeared to contribute to technical change in Xiamen industries and foreign investment enterprises appeared to stimulate limited technical change in import-substituting industries. The choice of capital-intensive technique , however, impaired economic efficiency, particularly in export . How capital-intensities, firm size, foreign owner hip and other factor at firm level affect export decision and export propensities in enterprise with foreign investment were studied in Beijing and Shenzhen. It was found that domestic-market-oriented direct foreign investment dominated in the four Special Economic Zone and fourteen coastal open cities where the ratios of output exported by enterprise with foreign investment seemed to be much lower than expected. Little evidence was found of a strong export performance by enterprise with formal investment in manufacturing in Beijing and Shenzhen in 1990. Partly at least because of the emphasis on the import of advanced technology, these enterprises were mostly oriented toward domestic market.