FDI & GDP GROWTH OF CHINA

Influence of FDI on the GDP growth of China

Abstract

The inward foreign direct investment is considered to be the greatest contributor of GDP growth in China. This paper discusses the facts that lead to the growth of the Chinese economy brought about by foreign direct investment. The paper examines the extent to which the foreign direct investment has influenced the growth in the Gross Domestic Product of China.

Influence of FDI on the GDP growth of China

Introduction

The foreign direct investment has a close relationship with the increasing growth of a country. It plays an important role in testing and debating the development economics of countries and the international economies. China is the country that has gained a considerable amount of growth during the time period from 1978 till 2005 (Zhang, 2006). It is considered to be the highest economic growth among the different countries of the world. The success in the terms of economic growth is usually associated to the implementation of such initiatives as foreign direct investment and international trade. The country has focused on the inward FDI (foreign direct investment) which is considered to be the most important aspect of its economic growth. In this way, China has become the largest recipient of foreign direct investment among the developing countries of the world and the second largest FDI recipient all over the world after the United States. However, in 2002, China was able to surpass United States with the inflow of FDI amounting to $ 53 billion (Zhang, 2006) (SSB, 2005). This paper discuses the role of foreign direct investment particularly the inflow of foreign direct investment in influencing the gross domestic product (GDP) of China. It analyzes the extent to which the foreign direct investment has contributed in the growth of the country (Wei & Liu, 2001).

Literature Review

The increasing growth in the economy of China can be associated to the increasing inflow of foreign direct investment in the country. There are several positive effects on the Chinese economy as a result of higher inflows of foreign direct investment. According to the neoclassical theories and the standard propositions provided in the theories, the foreign direct investment can be regarded as the engine of growth for the host economy (Zhang, 2006). It is due to the fact that the high inflows of foreign direct investment enhances the formation of capital in the economy and it leads to the augmentation of employment in the host country (Wei & Liu, 2001). The inward foreign direct investment also leads to the promotion of manufacturing proceeds in the country. In this way, they manufacture and export the products to other countries. The most important resource obtainable through the foreign direct investment may involve the skills, knowledge, abilities, labour and management know how of the international perspective. The labour of the country can get an access to the production networks of other countries and the existing brand names. The transfer of technology from the successful international players of the market ...