《《Foreign_Direct_Investment_in_China_Determinants_and_Effects》.pdf

Economics of Planning 31: 175–194, 1998. 175 © 1998 Kluwer Academic Publishers. Printed in the Netherlands. Foreign Direct Investment in China: Determinants and Effects STÈPHANE DEES University of Montesquieu Bordeaux IV, Avenue Leon Duguit, 33608 Pessac Cedex (France) and National Institute of Economic and Social Research (London) Abstract. This paper attempts to assess the determinants of Foreign Direct Investment (FDI) in China and its effects on the whole economy. After presenting the main theoretical contributions and the previous works done about China’s inward-FDI, an empirical study has been implemented extending the previous ones with a different data set (more recent) and with different methodolo- gies. The traditional determinants of FDI seem to be relevant for China: domestic market size, cost advantages and openness to the rest of the world. Concerning the consequences of FDI on the Chinese economy, our empirical evidence supports the view that FDI affects China’s growth through the diffusion of ideas. Through the introduction of new ideas, multinational firms develop technical progress and hence long-run economic growth. The transmission of ideas seems to have had a positive effect on the Chinese growth. JEL classification: F23, O33, P33 Key words: Foreign Direct Investment, Technology Transfer 1. Introduction The growth of Foreign Direct Investment (FDI) in China has been dramatic since the beginning of the economic reforms in 1978. China is now the second largest re- cipient of foreign capital in the world (behind the United States). The expansion of FDI in China has been accompanied by a rapid economic growth and an increasing openness to the rest of the world. It is important to ask why China has become one of the largest beneficiaries of FDI in the world, what are the most important determinants of FDI to China, and what are the effects of FD