Foreign direct investment in China: Recent trends and current policy issues

Foreign direct investment (FDI) is probably the single most important factor contributing to the globalisation of the international economy. Flows of FDI are forging increasingly strong economic links between developing and industrialised countries, and also among developing countries. Foreign direct investment flows to developing countries (LDCs) have increased nearly four-fold in the 1990s and now account for almost 40 per cent of global FDI, reaching some $120 billion in 1997. The focus of this article is on the current policy issues relating to the attraction of FDI flows to China. Section 2 considers the contribution that foreign direct investment can make to the recipient economy, and discusses the policy issues associated with attracting FDI inflows and ensuring that the benefits are shared between investor and the domestic economy to the mutual advantage of both parties. Section 3 summarises recent trends in private capital flows to developing countries and in particular East Asia, including China. Section 4 focuses on FDI in China, starting with a review of recent trends and continuing with a discussion of the main vehicles of FDI, the importance of Hong Kong, the regional distribution, and contribution of FDI to growth. The policy issues currently confronting decision-makers in China are examined in Section 5. The final section concludes the paper.