The Impacts Of FDI Retained Profit On China’s Economic Growth

Since the reform and opening-up policy in1978, the inflow of China’s foreign direct investment (FDI) began to increase, the Multinational Enterprises have valued the huge Chinese market, abundant natural resources and cheap labor. They have come to China to invest and build factories, with the development of economic globalization, China’s investing environment has been improving, the number of foreign investment in China has also been increasing. By the year of2003, China’s foreign direct investment had reached S53.5billion, that makes China become the largest host country to attract foreign capital in the world.However, we should realize that Foreign Direct Investment is a "double-edged sword", it brings us jobs, resources, technology and capital but also the potential crisis. Every year Foreign Direct Investment has made great contribution to the growth of Chinese economy. Growth has brought benefits, Foreign Direct Investment each year will also see a huge profit, this part is different from newly increased Foreign Direct Investment, it was more like foreign direct investment left by the "illegitimate", because these profits manifestation in the form of RMB, but it belongs to a certain foreign country, and it may collectively flee at any time. Imagine this, when the investment environment deteriorates, RMB is likely to face the reality of devaluation, this part of the huge profits at any time may be collectively absconded, this damage should not be underestimated.Therefore, this paper focuses on the FDI retained profits, we mainly keep an eye on the analysis of Foreign Direct Investment in retained profits outflow impact on the Chinese economy. This paper firstly reviewed the present situation of Foreign Direct Investment in recent years and made a positive evaluation of Foreign Direct Investment on Chinese economy. Besides, this paper also directly put forward that Foreign Direct Investment has left a huge "dark matter" Retained Profit, and reviewed the status of retained profits in recent years, we think that the retained profits flow has a tremendous impact on Chinese economy. Here’s how it works when the profit is kept in China, it becomes part of the new round of Foreign Direct Investment next year, that will definitely affect the Chinese economy, in this paper the impact has been divided into three categories: the impact on consumption, investment and net exports, based on which we draw the the integrated effect on Chinese economy.First, the consumption side, the outflow of retained profits will reduce the output of China, and ultimately will affect the consumption level of China, according to results, the outflow of retained profits, will make the consumption level lower in China.Second, In terms of investment, retained profit itself is the accumulation of capital. It may cause "Crowding-Out-Effect" thus, makes the reduction of investment in China, but it also may direct the Chinese investors, increase the domestic investment (that is "Crowding-in-Effects"). According to the estimating results, the outflow of retained profits will increase investment in China, indicating that the retained profits for investment in China is "Crowding-Out-Effect".Third, in terms of net exports, FDI retained profits of the outflow will cause the imbalance of international payments, the outflow will affect Chinese export enterprises, according to the estimating the results, the outflow of retained profits will reduce net exports.Finally, this paper gets the combined effect by building simultaneous equations, the outflow of FDI retained profits will affect China’s consumption, investment and net exports, it will ultimately have an impact on Chinese economy, decline the GDP in China. The results showed that although the ratio of FDI retained profits outflow of Chinese economy is relatively small, due to the growing ratio of FDI retained profits year by year the outflow base is growing, and its impact on Chinese economy should be underestimateAccording to the results of theoretical analysis and empirical testing, this paper put forward several suggestions from the angle of attracting foreign capital, control and guidance:First, we should determine a reasonable scale of foreign investment based on the analysis of China’s national condition and the development of Chinese economy, meanwhile, we should take the initiative,actively guide foreign investment flows and encourage long term Foreign Direct Investment according to the character of foreign capital and China’s national conditions, so that the foreign capital and Chinese economy will make a better combination, thus reduce the possibility of divestment and repatriation of profits. Second, the Government should regarded FDI as external debt, and put it into monitoring range, while strengthening the monitoring and statistics of FDI retained profits, to prevent or reduce FDI speculative behaviors, gradually granting national treatment to Foreign Direct Investment, reduce the preferential treatment, enhance its transparency and promote fair competition with local companies, remaining the high-quality foreign investment; Third, we should guide the outflow of FDI profits reasonably to maintain the balance of international payments; Finally, we should insist on going out strategy to increase China’s foreign direct investment, strengthen our competitiveness, so that even if FDI in China remitted profits to the impact on China’s economy, China’s foreign direct investment returns in a timely manner to compensate for this part of the difference to ensure that Chinese economy is under normal, healthy operation.Finally, we should realize that although most of the FDI retained profits in China, but these RMB-measured profits belong to foreign countries, it is just like a bomb could be detonated at any time and pose a threat to Chinese economy. This Paper choose the profit of Foreign-funded enterprises to substitutes the retained profit,and the purpose is to prove that the outflow retained profits will have an impact on all sides of China. Maybe it is not precise enough, but still representative. Imagine this, once China’s economic environment deteriorates or the appreciation of RMB reaches its cover and it is likely to face the reality of devaluation, the collective flight of FDI retained profits is not impossible, so I hope that through this paper we can pay more attention to the importance of the, so that we can monitor FDI retained profits properly and prevent potential crises effectively.