Fdi Impact to China Economy Essay

The successful in attracting FDI is due to the provision on both the internal and external specific country advantages. It secures cheap labor cost and the availability of raw materials as well as securing the opportunity on exploring the domestic market potential. It is probably a more important factor for service sector to get closer to the market being served in order to meet and understand local needs and tastes. Foreign investors not only achieve benefit from tax breaks and incentives, China has also reduced many of its import quotas which may ensure the security and continuity on accessing to markets, to a certain extent. In addition, they can operate in a low cost base for export to third countries which is a key motive for many firms. However, there exists a dilemma. It is believable that foreign capital has played a largely positive role in China’s economic development while, in contrary, there concerns FDI may bring detrimental effect. The benefits generated from FDI not just only help solving the capital shortage problem of the economy but also to augment the various aspects such as technologies, human capital, and operations etc as well. The opposition that concerns negative impacts on China’s development claims that foreign capital inflows may substitute for domestic savings and FDI makes worst the balance-of-payment deficits thereby rising debt repayment obligations. Moreover, the transition to a market economy has failed to protect workers with a minimum of social security benefits. The local worker has lost originally guarantee to full and lifetime employment that they were recruited and allocated through centralized system as well as achieving related benefits of housing, health care, childcare and pensions offering by the state. As such, unemployment became a feature of Chinese labor market. Under the following analysis, its aim is to work out how Chinese local workers have lost or gained while foreign direct investment in China has brought great benefits both to the nation and the multinationals. 2. Background Before the announcement of mainland China to its â€Å"Open Door† policy in 1978, it was a centrally planned economy. Large enterprises were state-owned and they were required to produce according to the plan rather than market demand. They were also responsible for the provision of welfare, pensions, schooling and hospitals for their local communities. Under the plan, the internal management structures of the state-owned enterprises (SOEs) were constrained and the accounting system, which functioning the allocation of assets for central authorities, was not designed to identify profitability. The economic reforms in China took place since the late 1970s and it has been a market being sought to enter by many multinational firms recently. The active government promotion through various policy measures resulted that foreign direct investment (FDI) in China has grown rapidly since then. During the first ten years of the reform period (1978-1988), China’s GDP grew at an average rate of around 10% per annum and its share of world trade doubled during the decade of the 1980s as well. From the period of the early 1980s to late 1990s, contracted FDI inflow to China grew from about US$1. 5 billion a year to more than US$40 billion a year in 1999. The rate of economic growth was even higher in the fist half of the 1990s.