Investor Characteristics and Main Determinants of FDI in China

By John Dudovskiy

FDI China’s rapid growth last three decades offered big opportunities for foreign companies eager to expand their business and market. Moreover, special privileges and tax incentives provided for these big companies led them heavily invest in China’s market and increased inflow of FDI into country.

As a result, today most global companies like General Motors, Siemens, Coca-Cola, Nike and many others are making more aggressive push into China, in some cases moving not only their production centres but their research and development centres too (Barboza, 2010).

Also, it is clear that FDI is usually imported to a host country by rather multinational companies than small-medium sized businesses, whose seeking to take advantage of particular benefits, that is to say cheaper work force, cheaper land value, cheaper taxes etc, in order to reduce the production cost and to gain a competitive advantage over rival companies.

Therefore, it is important to acknowledge how vital these Multi-National companies (MNC’s) have been to China’s rapid expansion in foreign trade and its export growth as  they introduced new and advanced technologies in many sectors and industries, most of which are export oriented, which in turn raised product quality. Furthermore, with creation employment and higher wages, they helped to raise living standards and to improve local infrastructure in rural areas of country.

Main determinants of FDI in China

There have been numerous factors that resulted in significant proportion of FDI inflows into China. But the most important ones that attracted huge levels of FDI into the country are the following:

First of all, since the economic reformation of China in 1979, the country realized that it needs foreign capital in order to improve the economic infrastructure of the country, therefore, it promoted the trade openness that enhanced the levels of FDI.

 Secondly, due to increasing levels of FDI inflows into the country,China achieved consistent and sound economic growth over the last 30 years averaging over 9% per annum. And this also has been another important factor that attracted Foreign Direct Investment, as according to common consensus and backed by other researchers such as Fahrian, (2007), Karkovic and Levin, (2009) and Zhang (2006), consistent economic growth usually attracts Foreign Direct Investment.

 Thirdly, the political environment also has been favourable for the attraction of FDI into the country, as Chinese government has introduced laws and regulations that supports and promotes Foreign Direct Investment such as Law of the People’s Republic of China upon Foreign Wholly Owned Enterprises, Law of the People’s Republic of China upon Sino-Foreign Joint Ventures, Law of the People’s Republic of China upon Sino-Foreign Cooperative Enterprises, and the Guiding Directory on Industries open to Foreign Investment.

 Fourthly, in order to meet the membership requirements of World Trade Organization,China has taken crucial steps in order to comply with the requirements of membership by liberalizing its international trade and giving more freedom to FDI inflows.

And finally, China has huge consumption base due to its 1.3 billion populations, therefore, even the domestic market is very large attractive for FDI even though majority of FDI enterprises tend to focus on exporting their manufactured goods and products.

Moreover, Giner and Giner (2003) indicate about the existence of broad consensus that foreign direct investment (FDI) occurs only when three determining factors exist which are: the presence of specific competitive advantages which are the properties of multinational companies; the existence of specific advantages of which are present in the country receiving the investment and finally the presence of greater commercial advantages at the intracompany level.

They further state that the first and third factors are directly linked to specific business conditions, whereas the second plays very crucial role which is the main factor that attracts foreign direct investment.

Singh and Jun (1995) have emphasized the importance of political and institutional questions as determining factors in FDI and further emphasized that the stability of the host country plays huge role in attracting and retaining of FDI within the country.

The effects of physical, financial and technological infrastructure on FDI

There is no argument that the extent of an area’s infrastructure development is important factor in an investor’s location choice, that is to say the more highways, railways and interior transport waterways are adjusted according to the size of host province, the more FDI inflows.  Similarly, level of telecommunication services are important variable in attracting FDI as higher levels of communications services will save time and reduce the cost of communication and information gathering, thus facilitating business activities (OECD, 2000).

The same can be said about the technological infrastructure as it is another important variable which increases chances of succeed in attracting FDI to host region. According to report from OECD (2000), in recent years, pushed by the market competition, the upgrading speed of China’s industrial structure has been accelerated. Particularly, the development of high-tech has been greatly speeded up. The report also states thatChinaand its provinces have developed various five to ten year plans and the enhancement of high-tech industry has been a top priority.

Furthermore, Broadman and Sun (1997), who carried out study to examine the determinants of FDI in China, also found that the availability of physical infrastructure affects the decision of choosing the investment place. After they empirically analysed the geographic determinants of FDI in China, their results confirmed that FDI in China goes to where there is greater development of basic infrastructure. The extensiveness of transportation is shown to have a significantly positive effect on location of FDI. The results also indicate that a one percent increase in transportation route density is associated with a 0.46 percent increase in provincial FDI accumulation.

Moreover, the FDI affects on economic growth through spillover effects on technological change. Economic literature identifies technology transfers as perhaps the most important channel through which foreign corporate presence may produce positive externalities in the host developing economy. MNEs are the developed world’s most important source of corporate research and development (R&D) activity, and they generally possess a higher level of technology than is available in developing countries, so they have the potential to generate considerable technological spillovers. However, whether and to what extent MNEs facilitate such spillovers varies according to context and sectors (Zhang, 2004).


  • Broadman, HG & Sun, X, 1997, “The Distribution of Foreign Direct Investment in China”, World Bank Policy Research Working Paper
  • Giner, JM & Giner, G, 2003, “An interpretative model of foreign direct investment in China; An economic policy approach”, China Economic Review no.15
  • Organization of Economic Cooperation and Development, 2000, “Main Determinants and Impacts of Foreign Direct Investment in China’s Economy”, Working Papers on International Investment, No. 2000/4
  • Zhang, KH, 2006, “Foreign Direct Investment and Economic Growth in China: A Panel Data Study for 1992-2004”, UIBE

Category: Finance