China is one of the most popular investment destinations in the world. For a number of years in the 1990s, China was the second largest recipient of foreign direct investment (FDI) in the world. Many hail China's large FDI absorption as a celebrated achievement of reforms. The central claim of this book is that the large absorption of FDI by China is a sign of some substantial weaknesses in its economy. FDI inflows into China surged in the 1990s because domestic firms were uncompetitive and they failed to capitalize on new business opportunities. Foreign firms responded by investing in China. China's partial reforms, while successful in increasing the scope of the market, have so far failed to address many allocative inefficiencies in the Chinese economy.
Foreign-invested enterprises (FIEs) are now a significant force in Chinese economy, as measured by their size, performance, and their encroachment on China's most important industries. This paper challenges many of the conventional views on the factors behind this growth of FIEs. The paper offers an institutional and policy perspective explaining the high Chinese demand for foreign equity capital. The basic contention is that FIEs’ advantages over domestic firms exceed the capital and technological advantages in their possession and these extra–ownership–specific advantages arise from the way the Chinese economic institutions are organized. There are two sources of these advantages. One is that foreign firms provide a range of functions that are under–provided by domestic firms due to regulatory and institutional factors. Another source arises from the fact that premium is conferred on FIEs’ form of organization. Certain advantages, by regulations and policies, are granted to FIEs and thus domestic firms have incentives to acquire these advantages by a process of corporate conversion into FIEs. These two sources of extra–ownership–specific advantages create a higher Chinese demand for foreign equity capital than would otherwise be the case under an alternative institutional and policy context.
Huang, Yasheng. "Why is There So Much Demand for Foreign Equity Capital in China? An Institutional and Policy Perspective." Working Paper 99–04, Weatherhead Center for International Affairs, Harvard University, March 1999.
Many claims about China's future breakup are based on hearsay and flawed assumptions. This article shows that China's political system is still authoritative; that China's governability has in fact increased; and that central economic and political control over regions has remained substantial.
Available in print format only.
Working Paper 95–01, Weatherhead Center for International Affairs, Harvard University, 1995.
WCFIA Working Paper 95-01. Later published as: 'Why China Will Not Collapse' in Foreign Policy, No. 99, June 1995: pp. 54-69.