The Relationships Between FDI and China’s Growth

Subject: Economics
Pages: 2
Words: 313
Reading time:
2 min

During the period 1978-2005, China achieved a growth rate of 9% per annum which is the highest rate achieved in the entire world during the given period. Much of this achievement is because of the radical initiatives adopted by China in regard to foreign direct investment (FDI). Having been an isolated company for almost the entire period before 1978, China became the biggest recipient of foreign direct investment in the developing world. Most neoclassical economists believe that FDI is a strong means to boost economic growth because inward FDI enhances capital formation and augments employment to a great extent.

FDI has the immense potential to boost manufacturing exports and bring in specific resources by way of management techniques, skilled labor, and established brand names. FDI also brings about large-scale technology transfers and spillover effects that further result in the development of the economy. In the case of China, a combination of all these advantages accrued to the economy, and the most prominent effect of FDI was the expansion of its manufacturing exports. Enterprises in China that are funded by FDI have greatly increased their volumes in exports and upgraded their export structure.

FDI has also immensely augmented economic growth in China by way of raising the formation of capital, enhancing industrial outputs, and adding revenue from taxes. Additionally, FDI has brought about extra benefits to China by facilitating its transformation towards a market system that has promoted growth in income. All these gains have resulted in the stimulation of the markets, made possible by the introduction of market-oriented institutional frameworks. FDI in China has contributed to the changes in the structure of ownerships towards privatization by bringing in policies that have promoted competition and facilitated the reform in state-owned companies. Above all, FDI has integrated China effectively into the world economy.