Introduction

By all means, foreign direct investment (FDI) in China has been one of major element in strengthen China’s economy. After the economic reform and opening of the People’s Republic of China was implemented in 1979, China has been one of the favourable destinations for foreign companies.  It has since grew immensely by 23.6% from US$1billion in 1980 to US$83billion FDI inflows (Fetscherin 2010). In recent years, China has become one of the strongest country in terms of their economy and top destination for foreign companies. Therefore, I would like to explore the relationship between FDI and economy in recent years.

 

Proposed Title

To what extent does Foreign Direct investments (FDI) impacts the economic growth of China in 21^st Century: An evaluation study of Foreign Direct Investments (FDI) in China from 2000-2015

 

Background and Rationale for the project

Foreign Direct Investment (FDI) is defined as a long term participation of a foreign country into the host country which could involve participatory in management, joint-venture, transfer of technology and expertise (Agarwal et al 2011). Over the years, there has been numerous researches done on FDIs on China and emerging countries which has revealed different results. For instance, some researchers have shown that different determinants behind the locational choice than other researchers. Different results were found out regarding the determinants of FDI in China and which has aroused my interest in reviewing and critically evaluating them.

 

In recent years, China has been one of the fastest growing economy in the world. On World Economic Forum, China is the 2^nd biggest economy in the world behind USA and they have predicted that China will become the biggest economy by 2050 (Gray 2017). While there are a lot of factors that impact the economy, GuechHeang and Moolio (2013) states that FDIs are one of the most important factor for developing countries for accelerating their economy. Over the number of years, China’s FDI inflow has grown has immensely by 23.6% since the economic reform occurred in 1979 in China. These indicators has aroused the interest of other researchers in the past. Furthermore, China’s growing economy has been one of the most talked phenomenon in today’s news which has provoked my interest to establish a research based around FDI in China.

 

On the other hand, there has been research done on the relationship of the economic growth and FDI in China. These researchers has used various dependent variables in showing the impact of FDI in China. Additionally, Openness of Trade variable has not been shown by researchers in China while it has shown a positive relationship has been conducted by researchers in evaluating the relationship of FDI and GDP in Pakistan (Iqbal et al 2013). Thus, it aroused my interest in adding the variable “Openness of Trade” and conducting a multiple regression in showing the relationship. Finally, China is one of the biggest countries in the world and made of a high number of majors cities such as Shanghai, Beijing and Shenzhen. Past recommendations by other researchers (Fetscherin 2010) has stated that major cities FDI inflow should be compared to the 2^nd tier cities of China. Therefore, an analysis will conducted in the research between some of the cities to minimise this gap.

 

 

Preliminary Review of the Literature

Dunning (2016) has previously identified 4 types of motivation indicators for foreign countries to invest in other countries: natural resource seekers, market seekers, efficiency seekers and strategic asset seekers that correlates with the main determinants of FDIs. These theories further help us understand the location choice of investments. China has undergone through various regulatory changes since the reform which has improved the attractive of FDI and more inward investment in China (Fetscherin et al 2010). Over the time, different authors have suggested various important determinants as listed: polices that supports the development of infrastructure in China and an industry base (Head et al 1996: 42), wage costs (Cheng et al 2000) and redevelopment of coastal provinces (Coughlin et al 2000).

 

However, these determinants may not be true and vary all the time as some determinants may be based on the objectives and motives of different companies. Belderbos et al (2002) state that, Japanese companies moved to investing simply because there were other Japanese companies already established in China. Additionally, the author suggested these determinants are ever changeable due to nature of company’s motives and changes in polices which aroused a gap in building up on this research with concrete information (Fetscherin et al 2010). In contrast with other developing countries, many China’s FDI are maintained as joint-venture between local and foreign companies. These indicators has eased the work of foreign firms The author has suggested to examined the distributions of 2^nd and 3^rd tier cities being less in comparison with major cities such as Shenzhen, Guangzhou and Shanghai (Fetscherin et al 2010).

 

Further studies done by other researchers has shown that FDI on developing countries (Demirhan et al 2008) can be affected by various factors such as Infrastructure, Tax, Market Size, and Labour cost. (Artige et al 2005) has found that market size as calculated through GDP is the major determinant of FDI. With host countries who have a larger and expanding market is seen to be an attractive destination for FDI. While (Charkabarti 2001) further states that as the market size grows, it will increase the FDI as firms will be benefited from higher capital and better use of resources. Thus, this hypothesis has been popular when showing the relationship between FDI and size of the market. (Chakrabarti 2001) has found that labour cost is another major element when firms invests in other countries. As cheap labour attracts big firms to establish their offices in a specific country. However from research done by (ODI 1997), when a country wage rates is similar to other country the skills of people determines their decisions. Regarding Tax, there has been mixed results from the researchers (Demirhan et al. 2008). Some researchers has shown that that country corporate tax has a negative impact on FDI while others have shown that it has a positive impact on FDI in developing countries. (Demirhan et al. 2008) used a regression analysis to find out relationship between variables in developing countries for period 2000-2004. They found out that better infrastructure, low wages, and low tax rates and market size has a positive impact on FDIs.

 

All countries looks forward to grow their economy rapidly and they are doing that by inviting foreign countries to invest in the country. There has been strong evidence from past studies that indicates that FDI promotes growth.  (Chadee et al) stated that FDIs has positive improvement on economic of Asia-Pacific region while (Merican 2009) suggests that FDI influences the economic growth more than Domestic Investment. (Zhang 2001) urges that flow of FDI does not only increase investment in the country but also improve the technology, tax revenues and workforce in an economy. (Onakoya 2012) implemented a 3SLQ technique that show that FDI affects GDP and significantly impacts the outcome of economy. (Agarwal and Khan 2011) has implemented a multiple regression to analyse the relationship between FDI and GDP as GDP is a major component of economic growth of a county.  The model that was used in the research was:

 

Y= f (K, L, FDI, H)

 

As stated in the research, FDI had a positive impact on economic growth on developing country. Therefore, the function consisted of GDP, Labour Force, FDI and Human Capital. As human factor plays an important role in the economic growth and has been part of Coub-douglas Production Function. On the other hand, one of the advantages of FDI is opening of jobs for local people which increases the labour force. An equation was created to gather the results from 1993-2009 in China and India using data from World Bank and UNCTAD (United Nations Conference on Trade and Development) which are verified sources used by many other researchers (Agarwal et al 2011).

 

 

 

 

 

 

The equation:

 

Y= β0 + β1 (K) + β2 (L) + β3 (FDI) + β4 (H) + ε

 

Where Y = Gross Domestic Product

K = Gross Capital Formation

L= Labour Force

FDI = Foreign Direct Investment

H = Human Capital

 

The results shows there was a positive relationship between FDI and GDP. As an increase of 1% in FDI will increase China’s GDP by 0.07%. In contrast to India, China is using their FDI better than India due to their policies, use of technology and lack of infrastructure in India (Agarwal et al 2011). However, (Makki et al 2004) stated that FDI correlates with trade positively and thus grows the economy, (Iqbal et al. 2013) used different conceptual model for Pakistan with Openness of Trade (OP) as an additional variable in it. They concluded with OP having a positive impact and showing relationship between OP, GDP and FDI.

 

The conceptual model that was used:

 

Y = B0 + B1L + B2K + B3H + B4 FDI + B5 (OP)

 

The results showed a positive relationship between in FDI and GDP in Pakistan. Thus, adding the OP variable can show much conclusive relationship between FDI and GDP for China in comparison to the model used by (Agarwal and Khan 2011).

 

 

 

Research Questions

 

1. What are the major determinants of FDIs in China?

 

2. How are the FDIs distributed geographically in China?

 

3. What is the impact of FDIs on GDP?

 

 

Research Objectives

 

1. To investigate and review the current literature on the factors behind China being a favourable location for foreign countries to invest into China

 

2. To examine the FDI inflow within the cities of China

 

3. To analyse and conduct a multiple regression on the impact of FDIs on GDP with the “Openness of Trade” variable in China

 

4. To compare the results of findings to other researchers

 

 

 

 

 

 

 

 

 

 

 

 

Research plan/methodology

The main objective of this research is to evaluate the performance of FDI on economic growth in China which will take consideration of the major determinants of FDI in China, the impact of FDI on GDP and growth of FDI in regions of China. These will done through reviewing literature of other researchers and regression analysis.

 

The first research objective will be achieved through analysing and reviewing the current literature available by various authors. These findings will be further understood and analysed to provide a concreate information. The views of other researchers will critically evaluated and reviewed for establishing a solid base on the determinants of FDIs.

 

The second objective will use data from National Bureau of Statistics of China and World Data Bank to establish a descriptive statistics with creating charts based on the FDI inflow in selected cities of China. The charts will illustrate the growth of FDI inflow in the selected cities and compared in order to show the differences in FDI inflow within these cities.

 

The third objective will conducted using a conceptual model from previous researchers (Iqbal et al. 2013) and establish a regression analysis. There will be certain variables taken into consideration for this objective. Firstly, the data for these variables will be taken from the National Bureau of Statistics of China and World Bank Data and will be inserted into SPSS and the conceptual model. Using this data, descriptive statistics will be implemented to show the basic results from the data. Taking descriptive statistics into consideration, Pearson Correlation will established to show the relationship between these variables using SPSS. Finally, all the findings will be compared to the findings that were found out by other researchers.

 

Research Design

The research will be explanatory in nature since the impact on economic growth in China behind the “phenomenon” of FDI will be evaluated. A mixed method approach will implemented towards this research. First, Quantitative approach will take to understand the opinions of other researchers to find out the particular determinants of China. These approaches will critically evaluated in comparison to other researchers in order to properly recognise these determinants. Then Quantitative approach will be considered as statistical information will be obtained from China Yearly Statistics and World Bank to calculate the data and to create charts. Moreover, the data that has been collected will be further examined to analyse the effect of GDP on FDI through multiple regression analysis and hypothesis testing which will be an experiment research in nature. These methods are suitable for my research and the outcome of this research will be compared to conclusions of other researchers.

 

Figure 1: Research Design (Sauro 2015)

 

This research design is most suitable in achieving my research objectives. As firstly, the data will be first explored and reviewed, followed up by using descriptive statistics and calculations in analysing the relationship between FDI and GDP in China. Finally, comparing the results to other researcher’s findings.

 

 

Data Collection

The data used within this research will be entirely secondary. For statistical data which is required to conduct descriptive statistics, regression and correlation analysis, that will be obtained from three databases to have valid and accurate data that has been used by many other researchers. The 2 databases will be National Bureau of Statistics of China and World Data Bank. The National Bureau of Statistics of China (National Bureau of China 2017) provides numerical data on the various attributes ranging from Infrastructure to FDI to many other. These data are provided based on the entire China as well as regions and cities. The World Bank (World Bank 2017) provides statistical information on all the countries such as World Development indicators. These sites has been previously used by many researchers and are valid sites to be used in my research as the data has been given by the Chinese government and international organisations. The data will be reliable as providing wrong information leads to fines and prosecution.  The selected period will be based from 2000 to 2015 and will compared to other researchers information. For the rest of data, Academic Journals based around FDIs will be used.

 

Data Analysis

The data collected from National Bureau of China for the FDI inflows within the cities of China will be then transferred to SPSS in order to conduct descriptive statistics which will show variables as listed: Mean, Median, Standard deviation, Total, and Range. Moreover, charts will be created to show which city has the most portion in terms of FDI in order to show the difference between the cities of China. The cities that will be taken into consideration will be: Shanghai, Guangzhou, Beijing, Shenzhen, Tianjin, Dongguan, Hangzhou and Chengdu which are some of the most populated cities in China from 2000-2015. In order to compare the data, line chart will be created in order to show the growth in terms of FDIs within these cities. Finally, a Pie chart will constructed to display the differences in terms of FDI inflow within these cities for 2015.

 

 

For my final objective, the data will be collected from the World Bank and National Bureau of China. Once the data has been collected then it will be inserted into the following conceptual model using variables with GDP (Iqbal et al 2013):

 

Y = B0 + B1L + B2K + B3H + B4 FDI + B5 (OP)

 

 

Where Y = Gross Domestic Product

K = Gross Capital Formation

L= Labour Force

FDI = Foreign Direct Investment

H = Human Capital (proxy: Human Development Index)

OP= Openness of trade (proxy: Imports and Exports)

(These components will show how the change in these variables will affect the GDP in China)

 

Using these variables, a descriptive statistic will be conducted showing Range, Mean, Minimum, Maximum and Standard Deviation for these variables for 2000-2015. After the data has been calculated using SPSS, Pearson Correlation and Multiple Regression will conducted to show the relationships of variables. Based on the results, hypothesis will be:

 

H₀: There is positive relation between with FDI and GDP in China

H₁: There is a greater positive impact of FDI with Openness of Trade on GDP in China

Limitations

The limitation of this research project will be usage of proxies. As stated in the methodology, I will be using proxies instead of the actual project due to lack of data. These proxies may create mixed responses from other authors. As different authors, will have different opinions, so they will look at these proxies from different perspective than my perspective. Another limitation will be word limit which will not allow the researcher to thoroughly in-depth analysis for other markets.

 

Moreover, as this research looks at the FDIs from China’s perspective. The findings of this research will be based around China but no other countries. As impacts and determinants of FDIs on economic in China are being analysed and examined throughout this research, the findings differs from other country’s perspective. Therefore, this research will not provide information on other countries’ perspectives and may be translated for other nations but the methods used are likely to help them.

Ethical Consideration

As this research will be using secondary data throughout the research, Ethics approval from the university will not be required as there will be no need for consent and participatory forms. Moreover, all the data will be taken from publicly available databases, thus making this research at low risk. As shown in the figure, No-living participant’s route will be taken. Therefore, Principle Investigator Certificate (PIC) will be required for this research.

 

 

 

 

 

Figure 2: Checklist (Coventry University Ethics 2017)

Time-Table

This time-table shows the planning of my research throughout the year. As third year will be commenced by 19/09/2017, this estimated time table has been made in relations to the tasks. This research will start from 19/09/2017 till 01/05/2018 as placement is not being taken. This time-table is based on estimation and is subject to change:

 

 

Task/Week Commencing

19/09/2017

26/09/2017

03/10/2017

10/10/2017

17/10/2017

24/10/2017

31/10/2017

07/11/2017

14/11/2017

21/11/2017

28/11/2017

05/12/2017

12/12/2017

19/12/2017

26/12/2017

02/01/2018

08/01/2018

15/01/2018

22/01/2018

29/01/2018

06/02/2018

13/02/2018

20/02/2018

27/02/2018

06/03/2018

13/03/2018

20/03/2018

27/03/2018

03/04/2018

10/04/2018

17/04/2018

24/04/2018

01/05/2018

Writing up the Dissertation

Reviewing the Literature

Research on determinants of FDI

Critical analysis on determinants of FDI

Find information on cities in China

Descriptive statistics

Create charts

Find information on GDP and FDI in China

Analyse the results from SPSS

Hypothesis Testing

Comparison

Recommendations

Conclusion

 

 

 

 

 

Reference

Agrawal, G. and Khan, M. (2011) “Impact Of FDI On GDP: A Comparative Study Of China And India”. International Journal of Business and Management 6 (10)

 

Artige, L. and Nicolini, R. (2005) Evidence On The Determinants Of Foreign Direct Investment: The Case Of Three European Regions. [online] available from <https://www.researchgate.net/publication/4737030_Evidence_on_the_Determinants_of_Foreign_Direct_Investment_The_Case_of_Three_European_Regions> [2 May 2017]

Belderbos, R. and Carree, M. (2002) “The Location Of Japanese Investments In China: Agglomeration Effects, Keiretsu, And Firm Heterogeneity”. Journal of the Japanese and International Economies 16 (2), 194-211

Chadee, D. and Schlichting, D. (2017) Foreign Direct Investment In The Asia‐Pacific Region: Overview Of Recent Trends And Patterns.

Chakrabarti, A. (2001) “The Determinants Of Foreign Direct Investments: Sensitivity Analyses Of Cross-Country Regressions”. Kyklos 54 (1), 89-114

Cheng, L. and Kwan, Y. (2000) “What Are The Determinants Of The Location Of Foreign Direct Investment? The Chinese Experience”. Journal of International Economics 51 (2), 379-400

Coughlin, C. and Segev, E. (2000) “Foreign Direct Investment In China: A Spatial Econometric Study”. The World Economy 23 (1), 1-23

Demirhan, E. and Masca, M. (2008) “Determinants Of Foreign Direct Investment Flows To Developing Countries: A Cross-Sectional Analysis”. Prague Economic Papers 17 (4), 356-369

Dunning, J. (2016) Explaining International Production. 1st edn. London: Routledge

Fetscherin, M., Voss, H. and Gugler, P. (2010) “30 Years Of Foreign Direct Investment To China: An Interdisciplinary Literature Review”. International Business Review 19 (3), 235-246

Grey, A. (2017) The World’S 10 Biggest Economies In 2017 [online] available from <https://www.weforum.org/agenda/2017/03/worlds-biggest-economies-in-2017/> [2 May 2017]

Head, K. and Ries, J. (1996) “Inter-City Competition For Foreign Investment: Static And Dynamic Effects Of China’s Incentive Areas”. Journal of Urban Economics 40 (1), 38-60

Iqbal, N., Ahmad, N., Haider, Z. and Anwar, S. (2013) “Impact Of Foreign Direct Investment (FDI) On GDP: A Case Study From Pakistan”. International Letters of Social and Humanistic Sciences 16, 73-80

Makki, S. and Somwaru, A. (2004) “Impact Of Foreign Direct Investment And Trade On Economic Growth: Evidence From Developing Countries”. American Journal of Agricultural Economics 86 (3), 795-801

Merican, Y. (2009) “Foreign Direct Investment And Growth In ASEAN-4 Nations”. International Journal of Business and Management 4 (5)

Moolio, P. and Guechheang, L. (2013) “The Relationship Between Gross Domestic Product And Foreign Direct Investment: The Case Of Cambodia”. KASBIT Business Journal [online] 6 (87:99). available from https://www.researchgate.net/publication/262488231_The_Relationship_between_Gross_Domestic_Product_and_Foreign_Direct_Investment_The_Case_of_Cambodia

National Bureau of China (2017) National Bureau Of Statistics Of China >> Annual Data [online] available from <http://www.stats.gov.cn/english/statisticaldata/AnnualData/> [2 May 2017]

Onakoya, A. (2012) “Foreign Direct Investments And Economic Growth In Nigeria: A Disaggregated Sector Analysis”. Journal of Economics and Sustainable Development [online] 3 (10). available from http://www.iiste.org/Journals/index.php/JEDS/article/view/2906/2969

Sauro, J. (2015) Measuringu: 3 Ways To Combine Quantitative And Qualitative Research [online] available from <https://measuringu.com/mixing-methods/> [3 May 2017]

World Bank (2017) Data | The World Bank [online] available from <http://data.worldbank.org/> [29 April 2017]

Zhang, K. (2017) DOES FOREIGN DIRECT INVESTMENT PROMOTE ECONOMIC GROWTH? EVIDENCE FROM EAST ASIA AND LATIN AMERICA [online] available from <https://ideas.repec.org/a/bla/coecpo/v19y2001i2p175-185.html> [2 May 2017]