Determinants of Fdi in China

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DETERMINANTS OF FDI IN CHINA

DETERMINANTS OF FDI IN CHINA
Shaukat Ali and Wei Guo1

ABSTRACT
Why and how firms take advantage of foreign opportunities, especially via foreign direct investment
(FDI) has been much documented. China, as a major emerging market, has attracted significant flows of FDI, to become the second largest receipt. This paper briefly examines the literature on FDI and focuses on likely determinants of FDI in China. It then analyses responses from 22 firms operating in China on what they see as the important motivations for them to undertake FDI. Results show that market size is a major factor for FDI especially for US firms. For local, export-orientated, Asian firms, low labor costs are the main factor. The paper concludes with managerial implications for businesses wish to exploit opportunities in China.

INTRODUCTION
The past few years has seen a tremendous growth of foreign direct investment (FDI) that has exceeded both world output and world trade. China is by far the largest recipient, and in 2004 surpassed the
USA as host destination. It has consequently attracted an increasing attention from multinational businesses.
Since China adopted the reform and opening-up policy in the late 1970s, foreign investment has played an increasingly important role in its economic growth. According to the World Investment Report for 2004 by the
United Nations Conference on Trade and Development, China absorbed a total of US$53.5 billion worth of foreign direct investment (FDI) in 2003. The Xinhua News Agency, quoting The National Development
Reform Commission, China's top economic planning agency, reported that foreign investment in 2004 rose to
US$60 billion, a 13 per cent increase over 2003. Contracted investment was US$153.5 billion in all of 2004, up one-third year-on-year. Other statistics also point to the importance of…...

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