This research studies the effect of the government in China when it makes some polices in attracting foreign direct investment (FDI) inflow. We use data and figures to analyze the economic development in China and the policies adjusted by Chinese government since 1978, pointing out how the government policy plays a significant role in attracting FDI inflow. It said that from 1978 Chinese reform the economy to now, because Chinese polices attract FDI, China became the biggest recipients among the most of developing countries. Policies including the “The reform and opening-up policies” China establish four Special Economic Zones (SEZs), along with favorable geography location to attract investment from Asian economy and help Chinese government receive the investment from Western countries as well. Next is exchange rate, through the currency policies adjustment to adopt the economic development and leading to more foreign enterprise investment. In addition, the government also used taxation extensively and selectively, combined with the exchange rate policy. Facing this situation, FDI inflows in China has had a positive trend since 1978. In conclusion, by researching these policies, we aim to make a clear view about the role of government and its significant effect in FDI attraction process in not only China but also in developing countries.

Table of Contents

Appendices 14

Introduction:

In the global economy, foreign direct investment (FDI) is a major catalyst for economic development and plays an important role in development process around the world. It accumulates physical and human capital, increasing the rate of employment and revenue. Investment needs consideration the effect of environmental investment. Cheap labor, raw materials, investment in labor, protection of labor rights and technology education, and these all drive investment development. FDI also was directed to the development of manufacturing enterprises and to natural resources.

Foreign direct investment (FDI) has two forms: outward FDIs and inward FDIs inflows. About outward: local capital, which is being invested in some foreign resource. The latter case, in the local resource occurred investment of foreign capital.

The global trend in FDI from US $55 billon in the early 1980 to annual worldwide FDI rose to just over US $200 billion and then in 2000 rose dramatically to almost US $1.4 trillion over six years.

When going through the whole economy, for developing country, FDI has a positive trend. Developing countries gain from the huge expansion during this period. FDI flows to developing countries rose from just under US $40 billion in 1990 to over $240 billion in 2000. In 1970, FDI to gross domestic product (GDP) is below 1 percent, however, the data is increase to 4 percent in 2000.This situation tells us for developing country, investors have more interest in seeking technology and investment in developing countries. Due to this, there is competition between the government of the developing countries around the world to attract FDI inflows to their own country. In our assignment, we focus on the case of China, the most successful region in absorbing FDI between the developing nationals, and their government’s strategies to compete with the other countries.

Background

In China, around 20 years ago, a baseline of FDI inflows was lower US $19 billion, which grew US $ 300 million in FDI in the next 10 years. Even though in 2009 there was a global financial crisis, there was still an increase in FDI. China is a major leader in growth, compared to other developing countries. Since 1978, China in FDI has rapid growth. In addition, China has the largest FDI recipient among most of the developing countries. In the fixed assets, foreign investment turns to more and more significant resources in China. In 1996, it appears the peak of 12 percent. During the 1997, because of the Asian financial crises, it made the FDI inflows decease to 9 percent, 7 percent respectively. Recently, from 2004 to 2006, FDI inflows to China have an increasing and stable trend, around US $ 800 million every year.