Research Summary
Research Summary
Selling China: Foreign Direct Investment During the Reform Era
Description
The aim of the book is to illustrate the dynamics of foreign direct investment (FDI) in China in the 1990s. The topic is important both because China is the world's second largest recipient of FDI and because there are substantial misconceptions about the drivers of FDI in China. The book opens with noting some of the seemingly anomalous patterns of FDI in China. These include: an inordinately high dependency on FDI compared to many countries, an across-the-board distribution of FDI in all industries, significant presence of foreign firms in industries at which Chinese naturally excel (such as herbal medicine), a prevalence of very small investors in perfectly competitive industries, etc. These patterns are at a considerable variance with common patterns observed in other countries. FDI, as formulated in standard economic theory, is a function of relative competitiveness of foreign firms over domestic firms. Relative foreign competitiveness is determined by competitiveness of foreign firms and/or by uncompetitiveness of domestic firms. The innovation of this book, compared to traditional treatments of FDI, is to focus on and explore the reasons for uncompetitiveness of domestic Chinese firms. Chinese uncompetitiveness leads to a rise in relative foreign competitiveness and leads to a higher incidence of FDI, just as competitiveness of foreign firms does. The central hypothesis is that the inefficiency of Chinese financial institutions suppresses competitiveness of Chinese firms across the board, leading to a higher level of relative foreign competitiveness in the process. The book presents an alternative interpretation of FDI dynamics in China during the reform era. The standard accounts portray FDI dynamics as rooted in China's fast economic growth, large market size, and a cheap but disciplined source of labor. My own explanation argues that FDI is better accounted for by looking at inefficiencies in the Chinese economy. The book also offers another perspective on FDI. Most of the works on FDI model FDI as a function of foreign competitive advantages; this book, however, focuses on the influences on FDI arising from domestic competitive disadvantages. Although foreign competitive advantages and domestic competitive disadvantages lead to an observationally-equivalent outcome--a rise in foreign competitive advantages, these are two distinct processes of generating high FDI incidence and they hold vastly different analytical and policy implications.