Since economic reforms began in 1978, China has undergone radical structural change from a command to a market–oriented system, and with it, dramatic economic results. The country?s gross domestic product (GDP) has enjoyed an average annual growth rate of about 10% for the past two decades, and its foreign trade 15%. Among the various facets of its impressive economic achievements is a massive influx of foreign direct investment (FDI). Starting from a moderate level, averaging about US$1 billion in the initial years of reforms, FDI inflows into China steadily picked up speed in the latter part of the 1980s, averaging about US$3 billion. They began to skyrocket in the 1990s, averaging more than US$30 billion. Recent inflows account for close to 40% of all FDI inflows to all developing countries, making China the largest FDI recipient among all developing countries and second only to the United States.
The aim of this article is to go beyond mere economic factors such as market size labor cost, and infrastructure provision to arrive at a more nuanced understanding of the underlying forces that shape the patterns of FDI in China. My intent is theoretical; my method is empirical. The point of departure is the assumption that private investments, where current costs are incurred for future benefits, are not shaped by market forces alone. As Robert Bates points out, investments, being inherently intertemporal, are vulnerable to opportunistic behavior, and therefore require the presence of non–market institutions for the protection of property rights and reduction of transaction costs.
Working Paper 99–08, Weatherhead Center for International Affairs, Harvard University, 1999.