China’s Economic Miracle
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China’s Economic Miracle

Does FDI Matter?

Sumei Tang, Eliyathamby A. Selvanathan and Saroja Selvanathan

This insightful book analyses the impact of Foreign Direct Investment (FDI) in China as well as making valuable contributions to the theory of FDI more broadly. The authors provide empirical analysis of key factors including the location-specific determinants of FDI; the impact of FDI on domestic investment, income distribution, consumption and tourism; the relationship between FDI inflows and income inequality; causality between FDI, domestic investment and economic growth; and causality between FDI and tourism. The study concludes that FDI plays a crucial and positive role in the economic development of China. Rather than crowding out domestic investment, FDI is found to stimulate economic growth by complementing it.
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Chapter 2: Theories of FDI on Multinational Enterprises and Related Empirical Studies on China

Sumei Tang, Eliyathamby A. Selvanathan and Saroja Selvanathan


2.1 INTRODUCTION FDI is not a new phenomenon, but has been a significant characteristic of globalization for the past 30 years. FDI is made outside the home country of the investing company but still controlled by the investor. FDI, unlike portfolio investment, consists of a ‘package’ of assets and intermediate products such as capital, technology, management skills, access to markets and entrepreneurship (Dunning 1992). In general, FDI is carried out by multinational enterprises (MNEs). MNEs are firms that engage in international production, which own or control value-added activities, such as manufacturing plants, located in at least two countries. With increasing globalization, FDI has become an important competitive strategy for MNEs and has resulted in investments all over the world. On the other hand, host governments consider FDI as crucial to the development of their economies. Theoretical and empirical research on FDI have evolved over the past 50 years (Dunning 2000). The theory of FDI, unlike other economic theories, comprises many different schools of thought. Most FDI theories are based on principles of microeconomics and the determinants of FDI or the motives of MNEs to invest abroad. This chapter presents a survey of the literature on FDI including the FDI theories and some selected FDI empirical studies on China. The organization of this chapter is as follows. Section 2.2 presents a comprehensive review of the theories of FDI. Section 2.3 discusses the controversy on the FDI theories in service industries. Section 2.4 reviews selected empirical studies on FDI and Section 2.5...

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