Foreign direct investment in China and its impact on manufacturing growth

Foreign Direct Investment (FDI) has been a hot yet controversial topic in the economy of China since the end of the 1970s when China opened its door to the outside world. Today however, the positive role played by FDI in China's rapid economic transition and growth has become obvious and undeniable. Thus, it becomes an interesting and useful task to carry out a thorough study of the economic phenomenon of FDI in China so that a small contribution can be made to both academic research and the policy making debate.
By mainly adopting Dunning's eclectic approach of FDI as the theoretical framework and also trying to adapt the relevant literature to the Chinese situation, this paper examines the quantitative trends and patterns of FDI in China and evaluates the relative contribution of FDI to China's manufacturing growth over the 15 years following the 1979 reforms. The empirical findings reveal that the trends and patterns of FDI in China have been determined by China's overall physical and institutional location advantages created or augmented by government reform policies. As a result, FDI in China has been positively associated with manufacturing growth, in terms of FDI's contribution to total fixed asset investment and therefore to industrial output growth, to manufacturing export growth and to the progress of technology. This study also highlights the problems and constraints faced by FDI in China and therefore the limited role played so far by FDI in China's economic growth, thus recommending the adoption of effective policies to further strengthen China's location advantages so that FDI will grow more rapidly and healthily in China and so will maximize potential gains from FDI.