• FDI and growth

FDI and growth

This paper presents assesses of the contribution of inward FDI to China’s recent rapid economic growth using a two stage growth accounting approach.

Recent econometric literature focuses on testing whether Chinese growth depends on inward FDI rather than measuring the contribution. Foreign Invested Enterprises (FIEs), often (but not exclusively) are joint ventures between foreign companies and Chinese enterprises, and can be thought of as forming a distinctive subpart of the Chinese economy. These enterprises account for:

• over 50% of exports and 60% of imports
• 20% of GDP in the last two years
• they employ only 3% of the workforce

Their production is more heavily for export rather than the domestic market because FIEs provide access to both distribution systems abroad and product design for export markets. The study results indicate that China’s FIEs may have contributed over 40% of China’s economic growth in 2003 and 2004, and without this inward FDI, China’s overall GDP growth rate could have been around 3.4 percentage points lower.

These findings raise the issue of the sustainability of both China’s GDP and export growth, which in turn seem to depend on the performance of the FIE sub-economy. China could still see further modest growth of inward FDI, supplemented by improvements in legal arrangements in China. Existing FDI may also contribute more in the future to China’s growth through accelerated technology transfer, and spillover effects not dependent on new FDI. But a problem for China remains ever growing trade pressures as the absorptive capacities of OECD markets become a constraint, and this casts further doubt on continued rapid export growth from FDI related activity. Seemingly more vigour in growth performance from the non-FIE sub-economy will be needed to compensate for further lagging growth performance from FIEs.

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