Foreign direct investment in China - An analysis of the current reform status

Seminar paper from the year 2003 in the subject Business economics - Business Management, Corporate Governance, grade: 1,7 (A-), European Business School - International University Schloß Reichartshausen Oestrich-Winkel (Strategic Business Management), course: Managing in the Global Economy, language: English, abstract: This paper addresses the question whether China has made enough reforms to justify significant investments and which additional reform steps are needed. The People¿s Republic of China (PRC) has shown tremendous Gross Domestic Product (GDP) growth in absolute and per capita terms of 9.3% and 8.0% per annum, respectively, over the last 25 years since market oriented reforms were started in 1978. Its GDP per capita has quadrupled over this period reaching around 1,000 US$ in 2003. The market oriented reforms in China can be divided into two stages, dubbed ¿reforming the system¿ from for the first 15 years and ¿replacing the system¿ from 1993 onwards. In the second stage a significant determinant of Chinäs success has been its policy of opening up the economy and attracting foreign direct investment (FDI). FDI grew with a compound annual growth rate (CAGR) of 26.7%, and the growth rates in the 90s have even been more staggering with FDI reaching about 50 billion US$ in 2002. This FDI growth went hand in hand with growing imports and exports, reaching over 300 billion US$ in 2003 with a CAGR of 14.7% and 15.6%, respectively. This paper aims at answering the question stated in the opening paragraph by analyzing the specific market oriented reforms which have taken place in the two stages of the Chinese reform process. The paper argues that China definitely has made enough reforms to justify the significant FDI which has been flowing into the country. However, there clearly is a need for more reforms as China becomes more and more interconnected in a globalized world economy, especially with joining the World Trade Organization (WTO) in 2001. Those reforms necessary to continue the Chinese success story will be addressed by analyzing reforms needed in the areas of the financial system, the rule of law, market liberalization and the governmental bureaucracy. The whole analysis will be guided by the analytical concepts of AHRENS 2002 as well as the institutional analysis in QUIAN 1999.