Foreign Direct Investment during the Reform Period

Author: Huang Yasheng
Publisher:
Publish Date: 2005-09-01
Features: In the field of China's economic issues, Huang Yasheng is rapidly becoming one of the most influential authorities in the U.S. academic world. It is this book that will have a significant impact on scholars, and in fact, it will also profoundly affect investors, and even China itself. This book will definitely change the methods of teaching and researching current political economy in universities. — William Kolby, Harvard University
This book offers a fresh and captivating perspective on the role of foreign direct investment (FDI) in China. Huang argues that the high level of foreign investment is, in part, due to China's failure to effectively allocate domestic savings, which contrasts with the widespread praise China receives in this regard. As China becomes a formal member of the World Trade Organization, this book will undoubtedly spark heated discussions about China's development model. — Susan Ross-Ackerman, Yale University
Students studying China's economic development—as well as its role as a model for 100 poorer countries—should read Huang's meticulous analysis. The analysis is logical, academically rigorous, and currently the best quantification of the scale and volume of FDI in China. Business managers, bankers, and capital operators who view foreign investment with optimism should read this book seriously to better prepare for success in the next phase of China's economic reforms. Chinese leaders should also study this monumental work, but can they address the "systemic" problems Huang identifies? China's institutional transformation—and not just economic growth—depends on the answers. — Daniel Rosen, Visiting Scholar, Institute for International Economics
China is one of the most popular investment destinations in the world. In some years during the 1990s, China was the second-largest recipient of global FDI. Many hailed China's large inflow of FDI as a major achievement of its reforms. In this book, Huang Yasheng presents a controversial counterargument: China's high level of FDI is a manifestation of certain fundamental weaknesses in its economy. Huang's premise is that FDI is fundamentally a microeconomic phenomenon, not a macroeconomic one. Under certain macroeconomic conditions, such as market expansion or low labor costs, a country may receive more or less FDI than domestic investment, depending on the relative competitiveness of foreign firms compared to domestic ones. FDI surged into China in the 1990s because domestic firms lacked competitiveness. Moreover, unable to provide capital for new business opportunities, foreign firms responded by "investing in China."
Huang identifies two reasons for this lack of competitiveness: One is the institutional hierarchy of enterprises, which allocates a significant portion of China's economic resources to inefficient state-owned enterprises (SOEs) instead of efficient private enterprises. The result is the general lack of competitiveness of Chinese firms. Another reason is severe market segmentation—caused by state ownership—which limits the growth and investment options of domestic firms while having a lesser impact on foreign investment.
The main benefits of FDI in China are related to: the privatization functions provided by foreign-invested enterprises, venture capital provided to credit-constrained private firms, and increased capital liquidity across regions. Huang argues that while these are indeed important and commendable benefits, one should still ask: Why can't domestic firms provide the same functions? This broader question requires an evaluation of China's reform strategy. China's partial reforms—though they have successfully expanded market scope—have yet to address many of the inefficiencies in resource allocation within its economy.