Importance of FDI and Export Push for the Sustainable Growth of China - Example

Why were export push and FDI important for Chinas sustainable growth from the late 1990s onwards? How does China successfully achieve export- and FDI-driven growth? Contents Contents 2 Introduction 3 Importance of FDI and export push for the sustainable growth of China. 3 Export led economic growth 4 FDI led growth of China 6 Ways in which China successfully achieve export and FDI driven growth 8 Export driven growth 8 FDI driven growth 10 Conclusion 12 References 13 Introduction The market economy of China is governed by the elements of products in terms of non-infrastructure services and goods, external capital derived from foreign direct investments from enterprises and from joint ventures and mergers and external trade activities. Both foreign direct investments and export have played significant roles in the development of the economy of China. The role of export and FDI in the economic growth and development of China after 1990 has been so extensive that the growth of the Chinese economy has been identified to be an export and FDI driven growth. Export levels and foreign direct investment activities of China have acted as the two main pillars on which the current economy of China has been built. China has been the largest recipient of foreign direct investments after the reforms of 1990s. Also, after the WTO accession of China, the country became the largest recipient of Foreign Direct Investment in 2002, surpassing the United States and the total amount of FDI inflow into the country being 10% of the global FDI spending. At the same time, adopting free trade practices helped to boost the growth of export level in the country, making it one of the most prominent players in global trading activities, especially with relation to exports. The growth in the manufacturing and industrial sectors of China further promoted the growth of FDI levels and export level which ultimately boosted the economic growth of China over the last 15 year since the economic reform. Importance of FDI and export push for the sustainable growth of China. Export and FDI have been the major engines driving the economic growth of China since the early 1990s. The adoption of an export and FDI led growth strategy by the country helped it to shift from being an autocratic country to being a globally interconnected player and a prominent country in the global production and trading activities (Franklin, 2005, pp.57-60). Trends of investment, real GDP, FDI and export in China from 1979-2003 (Source: Yingyi, 2000, p.152) Export led economic growth The export levels of China have increased more than ten times over the last 15 years and have exceeded threefold of the total volume of global trade activities in the last 15 years. China went on to become the third largest exporter in the world with only the United States and Germany being ahead of the country with respect to export volumes. The external trade activities in China were mainly carried out by the Provincial and State trading companies before the reforms of 1990. In 1993, China had more than 4000 government controlled trading companies. The external trade activities flourished after the economic reforms of 1990 and were boosted by the adoption of free trade practices followed by the WTO accession by China in 2001. The reforms were aimed at facilitating export activities by the domestic industries and firms and to allow foreign direct investment inflows into the country. The development of Special Economic Zones (SEZs) and Free Trade Areas (FTAs) supported the reforms in China in order to drive the economic growth of the country. The growth of Special Economic Zones and export processing zones were set up in China to allow the inflow of foreign direct investments in the country. The increased level of exports in the country after the opening up of the economy helped China to penetrate the global markets and establish itself as a prominent global player in the world trading activities. The composition of trade in China have been changing rapidly in the recent years with China importing the raw materials from other countries and manufacturing and assembling the goods to export the finished capital goods in other countries (Carsten, 2008, pp.1165-1691). The processing trade accounts for more than 50% of the total exports of China and one third of the total imports in the country. The export activities have contributed to the sustainable growth of the economy by producing export goods which are more sophisticated and which form a greater share in the input components of the global production supply chains. China is one of the main exporting countries in the present global business world with a chunk of the export activities being carried out in the manufacturing and textile segments of the country. The competitive advantage of the export sectors in China is driven by the ability of the country to support extensive volumes of production and not on the devaluation of currency. Since the total gross domestic product value of a country is a function of the net export levels in the country and is dependent on the net exports, the gross domestic product of China was highly driven by the extensive growth in the export sectors after the opening up of the Chinese economy. Economic growth versus export levels in China (Source: Wand, 2003, p.32) FDI led growth of China The role of Foreign Direct Investments has been highly significant in the economic development of China after the opening up of the economy in the 1990s. The high level of growth in the manufacturing sectors and the industrial sectors along with superior infrastructural development encourage more foreign multinationals to enter into the business domain of China either through setting up their own businesses or by investing through joint ventures and alliances with domestic firms. In both ways, foreign investment inflows came into the country and boosted the manufacturing and industrial sectors further. Also, the emergence of China as one of the fastest developing economies after the 1990s contributed to the investment attractiveness of the country. The opening up of the economy in 1990 encouraged the foreign investors to invest directly into the production and manufacturing activities in China. The first movers among the direct investors were the manufacturers and producers who traded in Macau and Hong Kong. After the opening up of the economy and the adoption of free trade practices, these producers established their manufacturing facilities in the Guangdong region of China where Special Economic Zones were set up and where the imparting costs for the manufacturing capabilities were much lower compared to other areas like Hong Kong and Macau. Normally, a country can attract Foreign Direct Investments only when the expected levels of profit are high. China emerged as the most viable option for foreign investors and multinational companies because the country started growing at an accelerated rate and showed the early signs of the potential for huge development and profitability for investors. The economy of China grew at an average growth rate of almost 9.5 % per year from 1998 to 2003. In this period, China experienced the fastest growth rate for economies in the whole world and the share of China in the world trade activities expanded hugely and also, China emerged as the most preferred and the largest recipient of investments from foreign companies and organisations. The foreign investments in the private sector of China, especially in the manufacturing industry were mostly dominated by the Foreign Invested Enterprises (FIEs). The gross domestic product from the foreign invested enterprises sector accounted for almost 22.5% of the total gross domestic product of China in 2004 which had increased by 10% from that in 1995. This added to the sustainable growth of the Chinese economy from 1990 to 2005. The foreign direct investments contributed to the growth of the economy by ensuring the inflow of capitals and also by bringing in new knowledge, skills and perspectives into the economy. Also, foreign direct investments increased the competition levels in the domestic market which forced the domestic firms to become more efficient in terms of performance in order to increase their competitiveness with the foreign multinationals. This led to the development of individual companies, industries and ultimately the overall economy of China. Foreign direct investments have enhanced the economic growth of China through increasing employment opportunities industrial output, capital formation and tax revenues. Role of FDI in Chinese economy (Source: Wayne, 2003, p.250) Ways in which China successfully achieve export and FDI driven growth The primary means of achieving growth in a country is through the growth of investments into the country. China ensured high investment flows into the economy by establishing the policies and reforms and by establishing suitable market principles to facilitate foreign investment inflow (Baizhu, 2000, p.15). The growth of China was driven by public sector investments and foreign direct investments combined with a proper degree of export activities in the economy. Export driven growth FDI export led growth has been experienced by other countries like Thailand, Singapore, Indonesia and Malaysia before China. China learned from these nations in order to take defective steps so that an ideal and sustainable export and foreign direct investment driven growth could be achieved for the economy (Nicholas, 2007, pp.180-184). China combined the export led growth and foreign direct investment led growth with the public investment activities to build up a strong and powerful economy. China built upon the expertise of countries like Singapore, Malaysia and Thailand to become a pioneer in FDI and export led economic growth. China pursued the foreign direct investment inflows aggressively by identifying and approaching the potential foreign direct investment investors in other parts of the globe including the middle income and low income countries as well (Ding and Knight, 2008, p.144). The country increased its investment attraction by implementing suitable reforms and policies so that the skills, technological expertise, and levels could be in raised along with the export activities in a sustainable manner (Hausmann and Rodrik, 2003, pp.603-633). China facilitated the labour intensive production activities in its industrial and manufacturing sectors by creating suitable conditions through policies like modification of the existing labour rights and introducing capital subsidies to meet any negative situations in the manufacturing sector of china. This further increased the competitiveness of the labour intensive sectors of China and the products produced from these sectors which form a major part of the exports of China. The insights into how China has achieved the export driven economic growth have become important aspects with respect to the global economic development. It can be indicated that China has achieved a phenomenal growth in the export levels by sophistication and diversification in the export sector of the country. One of the ways in which China increased the export growth was through the sophistication of the exports which was generated from the processing and manufacturing sectors of the country (Jean and Wacziarg, 2003, pp.63-86). the practice of sourcing raw materials from third world countries and assembling these duty free and intermediate inputs to produce the end products for export activities has helped China to achieve sustainable growth in the economy through the growth in the export levels. The composition of the export sector in China had changed significantly from 1990 to 2012. There have been major declines in the share of soft manufacturers like apparels and textiles and agriculture and rise if the hard manufacturers like appliances, consumer electronic goods and computers in the export sector (Hummels and Klenow, 2005, pp.704-722). Thus, China has successfully reallocated their export activities across sectors according to the increasing priority of the sectors in global trading activities. The sophistication of the export sector along with robust income growth in the country was driven by the fact that China exports products on the basis of priority of their contribution in the future economic growth of the country. FDI driven growth China has maintained unique attractiveness within the economy that helps in increasing the attractiveness of the country in terms of Foreign Direct Investments (FDIs). The preferential policies in China, the attractive foreign investment rules and policies, the increasing purchasing power of the consumers, the improved investment environment and the abundant source of inexpensive labour make China equipped to draw investments from foreign investors from across the world. The economic reforms of 1990 had already opened up the economy and helped China adopt new policies like free trade practices and open market which facilitated both foreign direct investments and global trading activities in the country. The accession of China in the World Trade Organization in 2001 further developed the potential of the country to boost its economic growth through an increased level of competitiveness and positive foreign investment policies. Net FDIs in China from 1982-2015 (Source: Denninghaus, 2013, p.390). Today multinational companies across the world see China as the most preferred destination for their investments because of the emerging powers of the nation as well as other conventional benefits like low operating costs and the availability of cheap labour. A majority of the industrial sector based countries contribute to the foreign direct investment activities in China due to the location advantages and due to the motivation of gaining access to the huge and fast developing Chinese market. China has managed to attract both export oriented FDI and market oriented FDI because of the extensive potential of the Chinese market and the increasing efficiency of the export sector in the country. The relatively cheap costs of labour also help in attracting inward investments. The Chinese government maintains attractive subsidies and investment policies which help to encourage more foreign multinationals to invest in this country. The control of the Chinese government over the currency values and exchange rates have also made China capable of ensuring foreign direct investment driven growth in the economy. One of the most prominent motivations of multinational companies behind their foreign direct investment activities is the aim of accessing new potential markets. Thus, the wide market of China supported by the increasing production and export capacities has also helped the country to maintain high investment attractiveness. After the economic reforms and WTO accession, China has given much concentration on maintaining the FDI attractiveness of the economy by employing suitable economic and government policies and market principles. Despite the negative factor of political instability, the Chinese economy has emerged as the largest recipient of foreign direct investment because of the economic reforms and government policies supporting foreign direct investment inflows. China has recognized the fact that its economy can maintain its position through the focus in foreign trading activities and investments. Thus, it has developed a suitable business environment in the country that facilitates foreign investments as well as global trading activities. Conclusion It can be established that foreign direct investment and export growth play major roles in driving the growth of the Chinese economy. The economy of China has seen major development and accelerated growth in the post reform period due to the boosts in the export level and foreign direct investment inflows into the country. However, after the global economic crisis of 2008, the sustainability of the growth pattern followed by the Chinese economy has been questioned. The growth in the gross domestic product of the country is the main indicator of the economic development of China and the continuous increase in the gross domestic product of China indicates that the economy is growing at a high rate and is extremely dependant on external demands. The high growth of the gross domestic output of China has been driven by the increasing export activities after the opening up of the economy. Thus, it can be indicated that the Chinese economy has been exceedingly dependant on investments and exports for the economic growth and stability. References Baizhu, C. 2000. Determinants of economic growth in China: Private enterprise, education, and openness. China Economic Review. Vol.11 (1), p.15. Carsten, H. 2008. China’s Economic Growth 1978–2025: What We Know Today about China’s Economic Growth Tomorrow. World Development. Vol.36 (10), pp.1665–1691. Denninghaus, M. 2013. 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