The Determinants of Foreign Direct Investment in China

Introduction 

Foreign direct investment (FDI) is defined by IMF as a situation where an investor residing in one economy owns 10% or more of the ordinary shares or effective voice in the management in another country ( Iamsiraroj, 2016 ). FDI is significant in global trade and economic development. FDI patterns contribute to the growth of the emerging markets including China. China is one of the largest economies in the world and has experienced phenomenal economic growth and development during the past decades. The extraordinary progress has predominantly been driven by the opening of China's border and economic reforms since the early 1980s ( Zilibotti, 2017 ). The Chinese economy has seen an average growth in Gross Domestic Product (GDP) of above 15 percent and consecutive increase in the national exports up to 21 percent in the 2000s ( Ding & Tay, 2016 ). 

The continued development has been speculated to surpass the united states as the world’s biggest economy and will continually become a more dominant player in the world economy as it continues to experience spectacular growth. Neoclassical growth models have stated the FDI improved economic growth by an increase in the efficiency of the economy through an increase in the level of capital ( Kok & Acikgoz Ersoy, 2009 ). China gets over US$60 billion in FDI mainly from transnational corporations. There are several determinants of FDI in such an emerging economy. This study attempts to identify the role of multinationals and the factors that China has put in place to attract FDI and elevate China in the global economy. 

Literature Review 

FDI flows include the value of cross-border transactions that are related to direct investment in a given period of time, usually annually. The financial flows are in the form of reinvestment of earnings, equity transactions, and inter-company debt transactions. FDI flows can be classified as either the outward flow that represents transactions that increase investments in a reporting economy and may include reinvestment of earnings or purchases through equity ( Determinants of China’s Regional FDI Inflows, 2013 ). The other form of FDI is the inward flows that seek to increase the investment of foreign investment in enterprises resident in a reporting economy fewer transactions that decrease the investment of foreign investments. FDI has continued to be a feature of globalization as the domestic markets become integrated with the global markets. 

China is one of the major destinations of FDI since it had its open door policies in 1978. FDI has become one of the largest impetus for China's economic growth. The successful policy propagated by the Deng Xiaoping leadership ensured that the inflows of FDI and international trade were increased (Matheson, 2007). Even the ascension of China to the World Trade Organization (WTO) was in part due to the inflows of FDI to China. Policies such as the legal framework of the Equity Joint Venture Law in 1979 that provided the legal background for foreigner investors to participate in joint ventures with Chinese partners. The policies were biased towards the china’s coastal regions through the establishments of four special economic zones in Fujian and Guangdong provinces. The special economies were to serve as china’s windows to the outside world and experimental enclaves to attract FDI. With time the special economic zones have grown in number and have accelerated China economic reform and the opening up policies. 

The FDI inflows allowed China to enter a high growth phase with China adopting policies to improve transparency and reduce taxes and tariffs. However, improving the protection of intellectual property and privatizing state-owned enterprises remain an issue in cultivating increased confidence in foreign enterprises in China. The industrial productivity level in China has been reinforced by the positive spillover effect brought about by FDI inflows ( Ran, Voon, & Li, 2007 ). Through FDI inflows domestic enterprises in China can derive technological knowledge and innovation and the inflows are significant as the main component of China's GDP accounting to more than 40 percent ( Ran, Voon, & Li, 2007) . 

The determinants of FDI have been grouped as either macro- or micro-determinants. Most micro-determinants of FDI are based on the size of a firm, its age and the firm globalization strategy ( Garavito, Iregui, & Ramírez, 2014 ). Product innovation and the effort put into the R&D, as well as the borrowing costs and investment incentives, are some of the micro-determinants of FDI in China ( Girma, Gong, & Görg, 2009 ). However, from an outlook into the benefit of FDI in China, there is a geographical advantage, exports attract FDI inflows in the Eastern part of China more than other geographical regions in China. 

In addition, China has different market level based on the geographical regions. For example, provinces and cities in Eastern China have a larger market size and high level of market demand that routinely attracts marketing-seeking FDI, thereby leading to the uneven FDI distribution in China ( Boermans, Roelfsema, & Zhang, 2011 ). Several studies have also shown that foreign investors prefer to invest in areas with large markets and low labor costs. In addition, other factors that are prevalent in attracting FDI in China include the short-cultural distance, adequate infrastructure, the short geographical distance, low labor cost as well as large market size and preferential policy towards foreign investments. High labor quality has also been shown to attract FDI inflow. It has also been demonstrated that increased FDI in one province corresponds to a negative GDP to a neighboring province. Overall, there is a wider range of factors that determine FDI in the China context. This study will propose an examination of a foreign multinational enterprise with a focus in understanding the factors that determine its investment in particulars provinces and cities in China and all other overriding factors. The most important sector for FDI is in the manufacturing sector. 

Investment pattern takes the form of joint ventures as well as wholly foreign-owned foreign enterprises. Wholly foreign-owned enterprises are usually based in Eastern China where they take almost half of the total investment in the area (Shan, 2017). In the central and western regions of China, the dominant investment pattern is joint ventures. These patterns reflect the investment environment and market maturity in the areas. However, it should be noted that joint ventures have been the main investment pattern since the open door policy was adopted in China (Shan, 2017). The wholly foreign-owned enterprises were introduced in the Chinese market in the late 1980s as the liberalization policy came into force in the country. In examining the determinants of FDI in China, the study will examine a number of variables. These determinants have often been mentioned in econometric studies. These include trade regulations, economic growth rates, market size, and exchange rate valuation. The conceptual framework will include the above independent variables as well as the moderating variable which is the government policy. In trade regulation, independent variables that will be investigated include the trade policy, population, openness to trade and economic development. Market size entails trade barriers, productivity, and economies of scale. The exchange rate valuation involves the term of trade, current account deficits, and government debt. The dependent variable in the conceptual framework is foreign direct which include income on debt, reinvested earnings and reinvested earnings. 

Research Question 

What are the determinants of foreign direct investment in China? 

Research Objectives 

To examine the factors that determine foreign investment in China. 

Methodology 

The research design for the study will avail the map for collecting data to answer the research question. In addition, a blueprint for measuring and analyzing the data will be at the core of solving the research problem. The study will engage a descriptive research design that will facilitate the researcher to describe the features of the variables of interest ( Rahi, 2017) . The target population for the study will be the entire collection of cases from which the researcher seeks to draw conclusions from. The study will focus on tech companies that have invested in China in the past two decades since China joined the WTO. 

Sampling 

Sampling strategy seeks to obtain a representative sample of the target population to include in the study. The sample size forms a finite part of the target population who properties mirror that of the whole population ( Rahi, 2017 ). The sample assists in the accurate generalization of the study findings to the whole population. The study will engage a stratified sampling strategy that will include 6 investment managers, 20 senior staff members from different departments in six foreign tech companies with investment in China. 

The research instruments will include questionnaires as the primary tool for data collection that will be delivered through an online survey. The questionnaires are preferred in this study since the target participants to the study are assumed to be literate and able to answer the questions satisfactorily. They are also able to collect large amounts of information in a relatively short period of time. The data collected will be analyzed in SPSS. Ethical considerations will include avoiding acts of misconducts in research such as falsification and data fabrication. Permission will be sought before the start of the survey through a letter of consent attached to the questionnaire. 

Conclusion 

In conclusion, based on the findings of the study, the study will establish the influence of the different variables on FDI inflows in the Chinese economy. The study potential anticipates that policies have a significant role in promoting economic growth rate and development since they provide sufficient attention to attract FDI. Administrative procedures and legal frameworks may act as the bedrock of accelerating economic growth and FDI. FDI inflows will be greater in countries with large and expanding markets as well as greater purchasing power. 

Reference list 

Boermans, M., Roelfsema, H. and Zhang, Y. (2011). Regional determinants of FDI in China: a factor-based approach. Journal of Chinese Economic and Business Studies , 9(1), pp.23-42. 

Determinants of China’s Regional FDI Inflows. (2013). China-USA Business Review , 12 (06). doi: 10.17265/1537-1514/2013.06.003 

Ding, X., & Tay, N. (2016). Some Challenges to Economic Growth and Stability in China. The Chinese Economy , 49 (5), 301-306. doi: 10.1080/10971475.2016.1193394 

Garavito A, A., Iregui AM, A., & Ramírez MT, M. (2014). An Empirical Examination of the Determinants of Foreign Direct Investment: A Firm-Level Analysis for the Colombian Economy. Revista De Economía Del Rosario , 17 (1), 5-31. doi: 10.12804/rev.econ.rosario.17.01.2014.01 

Girma, S., Gong, Y., & Görg, H. (2009). What Determines Innovation Activity in Chinese State-owned Enterprises? The Role of Foreign Direct Investment. World Development , 37 (4), 866-873. doi: 10.1016/j.worlddev.2008.07.017 

Iamsiraroj, S. (2016). The foreign direct investment–economic growth nexus. International Review of Economics & Finance , 42, pp.116-133. 

Kok, R., & Acikgoz Ersoy, B. (2009). Analyses of FDI determinants in developing countries. International Journal Of Social Economics , 36 (1/2), 105-123. doi: 10.1108/03068290910921226 

Matheson, J. (2007). Globalization with Chinese CHARACTERISTICS: China's use of merger, acquisition and investment policy in its economic development strategy. Willamette Journal of International Law and Dispute Resolution, 15 (1), 1-45. Retrieved from http://www.jstor.org/stable/26211712 

Rahi, S. (2017). Research Design and Methods: A Systematic Review of Research Paradigms, Sampling Issues and Instruments Development. International Journal Of Economics & Management Sciences , 06 (02). doi: 10.4172/2162-6359.1000403 

Ran, J., Voon, J., & Li, G. (2007). How does FDI affect China? Evidence from industries and provinces. Journal Of Comparative Economics , 35 (4), 774-799. doi: 10.1016/j.jce.2007.05.001 

Shan, G. (2017). The Evolution of China's Foreign Investment Policy and Law. SJD Dissertations, 7. https://elibrary.law.psu.edu/sjd/7 

Zilibotti, F. (2017). Growing and Slowing Down Like China. Journal Of The European Economic Association , 15 (5), 943-988. doi: 10.1093/jeea/jvx018