An Analysis On Domestic Equity Control Over Foreign Direst Investment

Economic Growth has been remarkable in China since 1978 when the economic reform began. There has been a rapid inflow of foreign direct investment (FDI) into China. However, the sectoral distribution of FDI in China is highly skewed. And the main the reason is the policy of ownership restriction by the government of China. From a host government's point of view, this paper provides you a simple framework to examine how equity controls affect accumulation of domestic assets and how the resulting assets accumulation affects outputs and national welfare. This paper gives a brief survey of FDI literature, discusses incentive and restrictive policy with focus on the latter. It presents a whole picture of host country's FDI policies, including those developing countries like India and Malaysia, as well as those developed ones, such as Australia, Canada, U.S., Japan and EU countries. The paper introduces China's FDI policy emphasizing on its domestic equity control and the issue of solely-ownership of FDI, a new trend worth attention in China. The paper presents a simple model to explain how national welfare can be affected by domestic equity control policy. Finally, it provides some suggestions on how to solve the problem of solely-ownership of FDI.