Impact of FDI on Chinese Economy

1. BACKGROUND OF THE STUDY:

For any country investment forms an essential part in the nation’s economy. It is symbol of getting globalized for particular work, attaining a name across the world and maintaining relationships with other countries. Investment act as a backbone for growth of the different aspects of economy of a nation. Furthermore, Foreign Direct Investment  (FDI) forms a base of economic development in developing countries. Developing countries possess low saving rates and foreign investment help them to accumulate economy for the nation. In this research, there will be a discussion about effect of foreign direct investment on the economy of China. China lies on first position when it is about emerging economies. Emerging economy is the term that is used to describe the countries that possess characteristics of developed markets but in actual such countries do not attain the requirements of the developed market. On the other hand, China ranks at second position for attracting foreign direct investment after USA. Incentives provided by government, cheap labor and land cost, huge domestic market etc. are the main reasons behind attraction of foreign investments in China. Number of foreign firms are being opened in China that are gradually expanding with huge profits and sustainability within the nation. McDonald’s is one the top leading brand among fast food restaurants that was first established in Shenzhen and with the flow of time it expanded in whole China. Other foreign companies like Pepsi, Motorola, Nokia, Coca-Cola and the supermarkets such as Walmart, Metro etc. are some of foreign firms that have attained significant position in Chinese market and are also producing a great inflow of FDI in China.

2. AIMS AND OBJECTIVES OF THE RESEARCH:

Aim of the research is to analyze the impact of FDI on economy of China in the context of domestic investment. To achieve the aim of research following objectives have been put forth:

• To scrutinize the determinants of FDI in China by utilizing the data of last 10 years.
• To analyze the effect of FDI on economy of China.
• To study the effect of displacement of FDI inflow on domestic investment of China.

3. RESEARCH HYPOTHESIS:

Based on the objectives and discussion carried over the impact of FDI on Chinese economy, following hypothesis have been conducted:

(Hypothesis1): FDI produces positive effect on the economy of China.

(Alternative Hypothesis 1) : FDI doesn’t produce positive effect on the economic growth of China.

(Hypothesis 2) : When there is an increase in the inflow of FDI in a particular sector, employment ofsector is declines.

(Alternative Hypothesis 2) : When there is an increase in the inflow of FDI in a particular sector, employment of that sector is not affected.

(Hypothesis 3) : Increase in the degree of high state ownership of a particular sector attracts low FDI.

(Alternative Hypothesis 3) : Increased degree of high state ownership of a particular sector doesn’t attract the flow of FDI.

These three hypothesis are set or tested against the alternative hypothesis that will help the researcher to evaluate the effect and consequences of FDI on the economy of China.

4. LITERATURE REVIEW:

This chapter deals with the consequences of FDI and its impact on the economy of China. According to Nicole and Sandra (2006), there hadbeen an evaluation of growth of different cities of Chinaby utilizing the data from 1990 to 2002. The research revealed that FDI produces positive effect on the economic growth of cities of China. Using the method of ordinary least squares, statistical model was built where the study was based on analysis of relationship between FDI and employment in Tanzania. The study showed that there exist positive relationship between FDI and employment. On the other hand, some efforts were made to detect the effect of FDI on domestic investment (Wang and Li (2004). The result showed that there was not significant effect in certain parts of China like western part and also China as whole. But eastern and mid part of China showed great displacement effects.

5. RESEARCH METHODOLOGY:

Empirical approach and secondary data analysis are the two primary approaches of current research. A regression analysis has been conducted with the help of secondary data collection method where the data has been collected from the sources like published reports of RBI, IMF and world bank. The economic growth of China is measured with the help of GDP from 2004 to 2014. This information helped to relate the data with FDI inflow in China. Furthermore, linear correlation analysis was used to analyze relationship between employment data of China and the FDI inflows. The effect of FDI on the economy of China is estimated by using the secondary information from the sources like published reports of Government of China’s statistics center, scientific research institutes, books, journals, articles and published database.

6. REFERENCES:

WHALLEY, J. and XIN, X. (2010). China’s FDI and non-FDI economies and the sustainability of future high Chinese growth. China Economic Review, 21(1), pp.123-135.

Yalta, A. (2013). Revisiting the FDI-led growth Hypothesis: The case of China. Economic Modelling, 31, pp.335-343.

Yalta, A. (2013). Revisiting the FDI-led growth Hypothesis: The case of China. Economic Modelling, 31, pp.335-343.

Zhao, C. and Du, J. (2007). Causality Between FDI and Economic Growth in China. Chinese Economy, 40(6), pp.68-82.