Foreign Direct Investment And Its Impact On China's Foreign Trade

After sealing itself for decades from the global economy, in the late 1970s China began to remove some of the barriers to the inflows of foreign direct investment (FDI). However, the lack of precedent, coupled with an uncertain political climate and other unfavorable factors, at first severely hindered Chinese attempts to attract FDI. In 1980, the inflow of FDI into China totaled less than $200 million (US dollars). In 1997, however, the inflow of FDI exceeded $45.2 billion, more than 225 times larger than the flow in 1980. That figure made China the largest recipient of FDI among developing countries, and the second largest in the world (after the United States). Even though in 1999, owing to a slowdown of economic growth leading to weaker demand, China saw a drop to just over $40 billion FDI inflows, in the following year 2000 and the beginning of the year 2001,we have witnessed another upsurge of FDI inflow.At the same period, China's foreign trade also went through exceptional growth. Its merchandise exports grew at an annual average rate of 15.8 percent, the highest growth rate in the Asia-Pacific Region. What is more important, the composition of Chinese exports has evolved from what used to consist of low-value added, labor and resource intensive commodities to the exports featured by high-value added, capital and technology intensive commodities.It is proper to say that China has evolved from being a largely self-sufficient, inward-looking country, to being one of the foremost recipients of inward FDI and one of the major traders in the world. Then what is the linkage between the FDI inflow and the trade performance? This is a topic which has been extensively discussed by economists and policy makers. From the experience of China, the very close correlation between FDI and trading performance is very clear and such a correlation can be proved to be positive. Take the year of 1999 as an example, the exports completed by foreign invested enterprises (FIEs) made up 45.5 percent ofthe total Chinese exports value and the imports completed by FIEs made up 51.8 percent of the total value. Besides the quantity, FIEs contribute a lot to the improvement of the quality of China's imports and exports and the whole competitiveness of China as a leading trader in the world.This thesis investigates the impact of FDI on Chinese foreign trade development. The goal of the investigation is to try to confirm their positive relationship and to offer policy implications for better use of FDI to further promote the development of Chinese foreign trade and the whole economy.The thesis falls into four parts. It begins with the general statement of foreign direct investment and international trade. Part one presents the theoretical views toward the relationship between FDI and foreign trade. Part two describes the whole development of FDI in China. It gives an overview of what FDI is like in China. Part three focuses on finding what kind of impact the FDI inflows have made on Chinese foreign trade performance and it ends with a conclusion that the former has played and will continue to play such a role as to promote the development of the latter. Part four first probes into the determinants of the development of FDI inflows in China and then suggestions are provided in order to make China a better destination for FDI inflows and a better stage to give full play to FDI's function in promoting the development of foreign trade. The whole thesis concludes with a forward look into the impacts on the development of FDI brought by China's accession into the WTO.