An investigation into the relationship between FDI inflows in China and the countrys economic growth

Content page
1. 2. 3. 4. 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7. 4.8. 4.9. 4.10. 4.11. 5. 5.1. 5.2. 5.3. 5.4. 5.5. 5.6. 6. 6.1. 6.2. 7. 8. 9. 10. EXECUTIVE SUMMARY............................................................................................................. 3 INTRODUCTION AND BACKGROUND .................................................................................... 4 CONCEPTUAL MODEL ............................................................................................................... 5 LITERATURE REVIEW ............................................................................................................... 6 The stages of FDI and entry modes evolvement ......................................................................... 6 Trade liberalization ..................................................................................................................... 7 The transition: the political and economic perspective ............................................................... 7 Government incentives ............................................................................................................... 8 Coastal versus Rural areas .......................................................................................................... 8 Round tripping ............................................................................................................................ 9 The Chinese government strategy for success ............................................................................ 9 The role of the currency ............................................................................................................ 10 Foreign-Invested Enterprises (FIEs) and Employment ............................................................. 11 Negative impact of FDI......................................................................................................... 12 Inward and Outward FDI: Is China moving along the Investment Development Path? ....... 13

Methodology ................................................................................................................................. 14 Quantitative research................................................................................................................. 14 Qualitative research .................................................................................................................. 15 Primary research ....................................................................................................................... 15 Secondary research ................................................................................................................... 17 The rationale for methodology choice ...................................................................................... 17 Research limitations and recommendations for further research .............................................. 18 DATA AND RESULTS................................................................................................................ 18 Hypothesis 1: FDI has had a positive impact on the Chinese economy ................................... 18 Hypothesis 2. China is losing its edge as a low cost centre for manufacturing ........................ 24 CONCLUSIONS........................................................................................................................... 27 RECOMMENDATIONS .............................................................................................................. 28 REFERENCES: ............................................................................................................................ 30 APPENDIX 1 ............................................................................................................................ 34

1. EXECUTIVE SUMMARY
Chinas economic success is often discussed in relation to the large volumes of foreign direct investment the country has received since the reforms in 1978. This research presents an indepth analysis of how FDI and economic growth are interrelated, namely identifying whether there is a positive link, a negative link or a synchronized relationship. By introducing a conceptual model, this work presents a clear structure to the researched area. The major factors that play a vital role in determining the outcome of the tested hypotheses are identified as the level of market transition achieved, government incentives, asymmetrical regional development, round-tripping, the exchange rate policy and the employment opportunities. The literature review consists of a broad yet specific overview of the selected key areas of discussion, in addition to which sub-topics such as Chinas move along the Investment Development Path are elaborated on. The choice of methodology, which is meta-analysis of secondary research data, is based on the fact that a number of empirical studies have already replicated results and the fact that the nature of the topic restricts the collection of primary data. Despite some mixed results, the conclusions from the first hypothesis testing imply that there exists a positive yet synchronized relationship between the examined variables, namely FDI and economic growth. The empirical studies also demonstrate a strong correlation between provinces with educated labour force and a higher investment rate. In a nutshell, the empirical studies conclude that the growth effects of FDI, exports and GDP have been interrelated, hence the unresolved issue is whether the countrys growth and foreign trade prospects may have attracted FDI in the first place. The second hypothesis testing confirms KPMGs recent report that Chinas move away from being the worlds largest low cost manufacturing hub is a distinctive emerging trend. What this research focuses on is determining whether this move has been a part of a natural cycle or a part of an intended government strategy. The conclusions suggest that regardless of the motives of the move, China can benefit more in the long run from foreign investments that are in line with the governments strategy of sustainable, environmentally friendly business ventures. The observed trends create the need for strategy modifications, hence a number of managerial implications can be outlined in the dynamics of the Chinese market. While a major challenge for firms willing to operate in China will be how to deal with the shrinking margins and the expected lower foreign investments in the low cost manufacturing sector, the disparity between rural and coastal areas is a factor to be taken into account. Since some of the rural parts are yet to experience the full capacity of inward FDI they can potentially attract, China could be one of the few places which can accommodate different development and foreign direct investment stages within the same borders.

2. INTRODUCTION AND BACKGROUND

China, the current leader of the BRIC countries, with its economic success has been an object of theoretical and empirical research in numerous academic publications (Kosack and Tobin, 2006). A major topic of interest that will be further investigated in this dissertation is connected with FDI inflows in China. In addition to continuing FDI inflows (Fig. 1), a rapid expansion of Western-based multinationals is being observed. They are continuously penetrating the Chinese market even in the current stagnation of the global financial markets. Figure 1. Change in Real GDP, 19702010 (Ten-year moving average of per cent change from previous year)

Sources: WDI database for China, Japan, and the European Union (http://databank.worldbank.org) and St. Louis Federal Reserve Database (FRED) for the United States (http://research.stlouisfed.org/fred2/)

The aim of this dissertation is to examine the relationship between FDI levels and Chinas economic growth. This work will apply a theoretical approach which will be further supported by meta-analysis of empirical studies as well as secondary data found in journal articles, official government and commercial publications. The literature review provides an extensive overview of the research literature that will be considered with focus on selected factors, discussed later in the work and used to determine the relationship between foreign investment in China and the countrys economic development rate. This sub-section is structured with view of the following goals/tasks: 1. Examine the stages through which FDI has progressed from agricultural reforms to industrialisation progress. 2. Describe the evolvement of entry modes over the last three decades, e.g. the transition from the encouraged joint venture entry mode in the 1980s to the encouragement of wholly owned enterprises in the late 1990s (Deng, 2011).

3. Identify the regional differences in China, namely the widening gap between the rich coastal areas and the underdeveloped rural areas that are not seen as attractive FDI destinations. Examine round-tripping as a mechanism by which FDI from Chinese firms, set up in tax havens, e.g. Hong Kong, generate the majority of the countrys FDI and boost the perceived FDI levels substantially. 4. Examine the role of the undervalued Chinese currency and its substantial impact on Chinas export strategy, the nominal value of labour cost and production costs from foreign firm perspective. Explain how the multiple devaluations of the Chinese Yuan have affected the exchange rate with the American Dollar and the Japanese Yen. 5. Find out whether the high employment rates and the steady inflation are related to the high FDI levels. 6. Examine the trend of inward FDI slowing at the expense of outward FDI shooting up. In the second part, the methodology, scope and limitations of the undertaken study will be outlined. By examining the advantages and disadvantages of secondary and primary research as well as the pros and cons of dealing with quantitative and qualitative data, the choice of methodology will be justified and the number of research limitations will be outlined. In the third part, the two hypotheses will be tested, namely, FDI has had a positive impact on the Chinese economy and China is losing its edge as a low cost centre for manufacturing. The testing of the first hypothesis will be in the form of a meta-analysis of four extensive empirical studies which will be used as a supporting evidence for the final conclusions. The second hypothesis will be tested in a way combining numerical evidence and theoretical discussion related to Chinas Five-Year Plan and a forthcoming economic redevelopment plan. The final conclusions regarding the research question will be drawn from the literature review and data analysis, referring back to what the conceptual model has outlined. The recommendations will comprise both what could be further researched as well as what are the managerial implications from the established relationship between FDI and economic growth.

3. CONCEPTUAL MODEL
The choice of literature reflects the need of a broad yet specific review of how macroeconomic factors impact the level of attractiveness for foreign direct investment. By using a variety of journal articles from established sources such as China Economic Review, Journal of Comparative Economics, Business Horizons and Journal of Monetary Economics, this literature review offers a critical perspective. Taking into account the time framework and the scope of the project, the conceptual model will follow a structured approach rather than a grounded one. The structure of the research is based on preliminary reading of theories, concepts and hypothess. This work will follow
5

what the conceptual model suggests, namely finding out what is the impact of the level of market transition achieved, government incentives, asymmetrical regional development, round-tripping, the exchange rate policy and the employment opportunities. Hence the conclusions drawn will support the process of evaluating the truthfulness of hypothesis one and hypothesis two. Figure 2. Conceptual model evaluating the steps towards testing H1 and H2
Level of market transition achieved

The impact of:

Government incentives

Asymmetric regional development

Round - tripping

Exchange rate policy

Employment opportunities achieved

Will determine whether

H1 H2

FDI has had a positive impact on the Chinese economy. China is losing its edge as a low cost centre for manufacturing.

4. LITERATURE REVIEW 4.1. The stages of FDI and entry modes evolvement

In order to understand how FDI has achieved its current levels and the extent of its influence on economic growth, it is essential to look at the historical trend line, the external environment at that time as well as the stages that foreign investment has progressed through. Yao (2000) analyses the changes in government policies since 1970. If at the beginning of the reforms, China was captivating foreign interest due to its agricultural reforms, then later it was the rural industrialization process which made FDI grow (Rozelle, 1994). Sun et al. (2002) suggest that China has been through three distinctive stages throughout its development. In stage one, from 1979 to 1985, a number of policies enabling the investment process were implemented, such as the formation of state commission responsible for foreign investment. During these years, initially four and later on fourteen new special economic zones (SEZs) were opened to foreign investment. Litwack and Qian (1997) look at the SEZs through three perspectives. Firstly, as a way to isolate foreign investment from the effects it can have on the domestic economic conditions; secondly, as an experiment of a western
6

model applied in a post-communist one and lastly, as a way to strengthen the economic relationship with Hong Kong. Sun et al. (2002) argue that stage two follows the decline in FDI at the end of 1985. Due to the high inflation, the government changed its strategy. While until then only joint ventures were allowed, the government started granting permission for wholly owned enterprises. During that stage, a large number of government incentives were introduced, namely tax incentives and generally provision of more autonomy for foreign investing enterprises (FIEs). If during stage one, the majority of investments was concentrated in small-sized assembling and processing for exports, in the second stage, more than two thirds of FDI projects were within the manufacturing industry. While the first and second stages of development were characterized by double-digit growth in FDI, the process slowed down in the late 80s, which encouraged the Chinese government to undertake reforms. The growth was resumed once a modification in the joint ventures regulations was introduced, in addition to a foreign enterprises income tax law. The beginning of stage three, from 1992 onwards, was a period of mounting FDI levels, while at the same time there was observed an increasing practice of substituting contractual joint ventures with the growing trend of wholly owned subsidiary entry mode. Lastly, in terms of focus of investment, the shift was towards large manufacturing and infrastructure projects. The research undertaken by Yao (2006) and Zhang (2001) suggests that the belief in the neoclassical approach of creating growth through international trade was the driver for the Chinese governance in the 1990s towards greater market openness, attributing the current competitiveness of the Chinese market to that early development.

4.2.

Trade liberalization

The trade liberalization, examined by Lardi (2003), undoubtedly contributed the most to the increase in competitiveness, the switch from a physical planning of the trade process to the current state of China having one of perhaps the most open emerging market economies. The long and arguably patchy evolution of tariff and non-tariff barriers was close to its end in 2001 when China entered the World Trade Organization. Another transformation was the refined export performance and export structure, caused by the increasing number of ForeignInvested-Enterprises and the consequent technology, marketing and management spill overs (Zhang, 2001). If in the post-communist period Chinas trade balance was negative, the boosted trading rate made the countrys trade balance positive in the 1990s and it reached almost $44bn (Zhang and Song, 2000).

4.3.

The transition: the political and economic perspective

Zhang (2001) looks deeper into the impact of the transition by identifying three main drivers. Firstly, ownership structure, which used to be predominantly state owned, moved towards the more desirable blend according to the neo-classical theory, of partly private, partly stateowned institutions. As a result, in the late 1990s the major proportion of gross industrial
7

output was due to the newly privatized enterprises. Secondly, the transition wouldnt have been so successful if the necessary legal and economic frameworks had not been established. It wasnt until the 1980s that special economic zones were established which enabled the rapid growth specifically in the coast areas. Even though this government liberalization policy had major positive outcomes, the gap between rural and coastal China increased and this tendency will be critically evaluated later on in the literature review. Thirdly, Zhang (2001) identifies joint ventures as a significant factor in establishing market-oriented policies including management systems and reward systems. Ali and Guo (2005) look further into the positive outcomes that the transition has brought to Chinese economy. Firstly, the impact on the competition has been one of the most visible ones since state monopolies decreased in size and range. Moreover, the manufacturing sector was pushed to become arguably the most competitive one due to the emergence of FDI. An additional factor contributing to competitiveness was the diversification in the ownership structure since many state enterprises were transformed into private or collective ones. What the authors illustrate as well is the pressure that foreign investing enterprises (FIEs) created on the formalisation and often formation of legal frameworks, making the Chinese institutions even more market oriented. Lastly, the transition brought the need for a number of reforms, which often took place not only at policy and institutional level but also in the form of management systems, which changed to systems with a more business appealing outlook.

4.4.

Government incentives

As Buckley and Meng (2005) have pointed out the increased competitiveness of foreign firms operating in China has created some winners and losers. As the process of liberalization in China offered much more favourable conditions to foreign firms than to domestic enterprises, it was the SMEs that benefited the least. For example, what FIEs received involved duty exemption for their input imports only if those inputs were later on used for re-exporting. Apart from duty exemptions for goods produced locally and then exported, other major privileges offered to foreign-owned firms were low corporate taxes and access to natural resources (Schlevogt, 2000)

4.5.

Coastal versus Rural areas

It could be argued that economic welfare, if distributed unevenly, could cause more negative than positive outcomes. Chen and Feng (2000) look into the differences at a regional level, evaluating some of the drivers that have pushed the coastal areas into being flourishing business destinations and have caused the rural parts of China to be lagging behind. As other empirical studies confirm (Barro and Lee, 1993), FDI has been spread disproportionately. Chen and Feng examine are a number of factors that have had an additional effect on economic growth in various regional areas. Apart from the levels of international trade, among those factors are income distribution, government spending as well as inflation rates.
8

Their conclusions point out that while transaction costs for international trade may be too high, trade between rural and coastal areas will be beneficial. Thus, inner trade can have a positive impact on the harmonization of growth and take place in the form of a synergy. Yao (2006) examines the pre-2000 period and specifically the relationship between the establishment of free economic zone and the increase in FDI. If in the early years just after the 1978 reform, FDI had insignificant levels, then by 2001 the inflow increased to almost 47 billion dollars. Some of the early reforms included the setting up of Guangdong and Fujian as free economic zones, and later of the Shanghai area in 1991. While the reasons behind choosing coastal areas were directly related to their better transport connections, industrial base and easy access, the fact that FDI concentrated only in these areas widened the gap between rural areas and the wealthy, quickly developing coastal area.

4.6.

Round tripping

The choice of special economic zones in immediate vicinity of Hong Kong, Taiwan or Macao was far from an unintentional move. As all three countries are predominantly populated with Chinese residents and have close cultural proximity, there is a high likelihood of foreign businesses being interested in operating under the favourable Chinese conditions. Harrold and Lall (1993) argue that large amounts of capital return back to China covered as FDI, while taking advantage of the benefits offered to foreign firms. In this way, a Chinese firm registered in Hong Kong, could receive tax incentives and duty exemptions when it invests in China. According to Lau and Bruton (2008), the largest foreign investments in China are indeed from Hong Kong, leading to the border province of Guangdong having constantly increasing FDI rates. The impact of round-tripping can be seen not only as misrepresenting the actual FDI figures. Tseng and Zebregs (2002) argue that both foreign investors and local officials could exaggerate the money invested and the money received, as they have the incentive of either reporting lower taxable income or demonstrating the ability to attract high levels of FDI.

4.7.

The Chinese government strategy for success

According to Yao (2006), what is indicative of the countrys willingness to become the worlds biggest exporting hub, are Chinas gradual steps towards reformation. Namely, his research suggests that the most important reform was the one in the foreign exchange market. By devaluating the Chinese Yuan, formally known as RBM, the Chinese government has enabled an export-led strategy. Fuelled by a combination of government policies aiming to attract foreign enterprises and open markets, China has become one of the most attractive places for conducting business. The model developed by Yao (2006), illustrates the impact of exchange rate on FDI, export as well as GDP. As the arrows indicate the direction of impact, this evidence suggests that exchange rate impacts significantly FDI, which is treated as a variable. Figure 3. Interface of output, export and FDI in China
9

Source: NBS (1996), NBS (19972002) Tseng and Zebregs (2002), OECD (2002) and Ren and Pentecost (2007) built a model, shown in Fig. 4, that illustrates the determinants of the rising FDI levels. What is considered attractive for foreign businesses relates mainly to the currency devaluation, on top of tax concessions and open door policies. Figure 4. Main determinent of Foreign Direct Investment Policies

Source: Tseng and Zebregs (2002), OECD (2002), Ren and Pentecost (2007) Recent data illustrates that for the first half of 2012, China has been the single largest FDI recipient country in the world, while at the same time there has been a global fall of FDI with almost 10 per cent (ChinaDaily, 2012).

4.8.

The role of the currency

As international transactions involve constant exchanges of foreign currencies, Chinas RBM rate has played a vital role. Zing (2006) argues that the often ignored research topic of the role of the Chinese Yuan devaluation could be largely the answer to the controversial question about the countrys economic success. In the period from 1989 to 1995, the Chinese Yuan was devaluated a number of times, arguably due to its overvaluation during the time when China was a centrally-planned economy and because of the domestic inflation as well (Xu, 2001). Prior to 1995, the currency devaluation made both Chinese labour and overall production input much lower compared to foreign costs of the same kind.
10

Moreover, assets such as land decreased substantially in value, encouraging foreign firms to relocate large-scale production facilities (Xing and Wan, 2006). Frankel (2006) looks into the advantages and disadvantages of having a fixed or alternatively a flexible exchange rate. He argues that the Yuan being virtually pegged to the dollar may have had pros in the past but currently the economy could benefit more if it has the flexibility of adjustments, e.g. the natural appreciation process. One of the advantages would be that the current low value, which is arguably low not only in comparison with developed countries, but below the equilibrium value for a country at Chinas stage of development, would be able to rise. In addition, the impact of switching to a flexible rate would involve saving the cost of buying low-return US treasury securities, instead of taking advantage of its own accumulated surplus of balance payments. Lastly, Frankel (2006) argues that a common problem for highly growing economies is the risk of government overspending. Even though in China there have been introduced policies encouraging less public spending, higher interest rates to discourage long-term borrowing as well as tighter credit regulations, a missing lever in the regulatory government spending mechanism is a currency rate which cannot respond to volatile conditions. Xing (2006) undertakes a specific research into the relationship between the US dollar, the Chinese Yuan and the Japanese Yen. The relationship he discovers is that while the Yuan has been appreciating in relation to the dollar, it has depreciated towards the Japanese Yen, leading to an increase of the FDI coming from Japan. While this finding can be seen as contradicting the fact that the dollar and the Yuan have been in a steady relationship, the few large fluctuations have had only a minimal effect on the nominal exchange rate. Whether the Dollar-Yuan relationship is likely to continue under the same terms, would partially depend on the degree of pressure the US is likely to impose as a primary trading partner. In 2005, China yielded to the pressure by raising the value of the Yuan to the American dollar by 2 per cent. Since then, a number of further threats from the American government have been made. There was a warning of import tariffs for Chinese goods, unless the Yuan changed its state of a "fundamentally misaligned currency" (Simpson, 2011). This threat could be prevented if the policy makers manage to introduce a balanced system of regulatory policies that do not alienate Chinas trading partners, nor put the stability of the economy at risk.

4.9.

Foreign-Invested Enterprises (FIEs) and Employment

Whalley and Xin (2006) investigate the effects that FIEs have produced in terms of productivity increase, spill-overs as well as job opportunities. According to their research, there is a nine-time difference in labour productivity between FIEs and domestic firms. Some of the positive outcomes have been the advanced technology spill-over as well as the knowhow which investors have brought to the commercial landscape. Moreover, the authors have examined the employment rates in China which have been increasing steadily for the last 30 years. What is debatable though is the extent of FIEs contribution, taking into account that FIEs have created the insignificant 3% employment opportunities, although adding about 20% towards the countrys GDP.
11

Liu (2012) undertakes an extensive study of the long- and short-run links between FDI and employment in China and examines two strands of literature, providing contrasting views. Ford et. al (2010) suggest that within the broad framework of employment, human capital and liberalization, FDI has had negative impact on the creation of jobs and even on the countrys economic growth. Contrastingly, Zhang and Ren (2005) have come to the conclusion that FDI facilitated the process of promoting Chinas employment structure, effectively transforming many rural industries into non-agricultural ones. Lius empirical research (2012) draws conclusions regarding the effects in the long run, and in the short run. Firstly, by exploring the effects on an industry level, the author concludes that employment was encouraged by FDI in the second and tertiary industries. Moreover, it is believed that the transition of more labour force from the primary to the secondary industry would further promote Chinas industry restructuring and would attract more FDI. Secondly, in the short term FDI is also seen as the driver for the tertiary industry, even though with a limited scope. The mixed results from the examined literature demonstrate that while there isnt a unified view on the positive relationship between FDI and employment rates, a correlation could be seen between the increased levels of FIEs penetrating the market and the demand for workers in the secondary and tertiary industries.

4.10. Negative impact of FDI

Stohldreier (2009) argues that despite the positive impact of FDI on a number of economic areas, the high levels of FDI have led to over dependencies, suppression of the domestic market, lowered domestic savings, overcomplicated tax system, unfavourable conditions for local businesses, growing inequality gap between regions. Zhang (2001) suggests that the Open Door Policies have encouraged large numbers of foreign firms to take advantage of the favourable economic conditions in China. By offering employment opportunities, renting out manufacturing facilities and having an impact on the economys growth, it could be argued that FIEs have created a highly dependable system where exports are the main economic driver. While Borensztein et al. (1998) find domestic and foreign investments complementary to some extent, Zhangs research (2001) suggests that in the long run GDP is lowered and dependency is enhanced through the lowering rates of domestic investments. Moving on to the issues related to inequality, both the tax system and the incentives system are seen as drivers for the widening gap at a regional level (Jones et al., 2003). By offering considerably more favourable conditions to foreign firms, it may be argued that the Chinese government policy accounts for the issues related to round tripping and exacerbates income inequalities.

12

4.11. Inward and Outward FDI: Is China moving along the Investment Development Path?
All drawbacks that the reviewed literature has identified link logically with the recent announcement about Chinas growth levels. If for the last 20 years China has been the major FDI recipient, the increasing labour costs related to the higher wages, as well as the appreciation of the Chinese currency, contribute to multinationals rethinking where to invest in the future. According to Anderlinis report (2013), Chinas FDI levels have significantly slowed down by 3.7% compared to 2011, while the outbound direct investment has gone 28.6% up. The impact of this change in the inward-outward ratio could be interpreted as the countrys move on the Investment Development Path - an extension of the OLI paradigm, developed by Dunning (1981). Figure 5 illustrates the effect on net outward investment position that a transition from Stage 3 to Stage 4 could lead to. Figure 5. The Investment Development Path

Source: Filippaios and Stone (2012), Business in Emerging Markets presentation, KBS What illustrates a country exiting Stage 3 is an extremely high inward FDI achieved, followed by a gradual decrease of the growth and a slight increase in the net outward investment. Regarding the OLI paradigm, firms in transition would be incentivised by the growing ownership advantages, which would become far more firm-specific and less country-specific. Domestically strong firms will be encouraged to seek location advantages by an international expansion while also asset- and market-seeking abroad, fulfilling the internationalization advantage from the paradigm. The transition towards Stage 4 is characterized by a continuation of the trends from Stage 3, combined with an increase in the outward FDI rates. In Chinas case, with World Banks

13

forecasts of 8.4% growth, there are no expectations of returning double-digit GDP growth rates (Anderlini, 2013). The implications for such a move along the Investment Development Path could mean that China may stop being the most attractive recipient of FDI within the emerging economies, but could arguably become one of the most powerful outward investing economies. Relating it to the research question of the dissertation, this literature review may conclude that inward FDI has had a positive impact on the economic growth, but it may be the outward FDI that will determine the economic success rate of the country in the future.

5. Methodology
This part aims to investigate the specifics of primary and secondary research as different approaches towards investigating a research topic. Since the two types of research suggest certain limitations, once the overview has been completed, the rationale for the choice of methodology will be outlined. Walliman (2005) emphasizes that the type of data collected determines to a great extent what methods will be used to answer the research question. He suggests that quantitative and qualitative research present two diametrically opposed research approaches, which while very different in their nature should not be used in an exclusive manner.

5.1.

Quantitative research

Best and Khan (1989) describe quantitative research as the type that deals with data that could be analysed in a numerical form. This type of research is also seen as the one that is more easily interpreted and analysed. Blaxter et al. (1996) suggest that quantitative research tends to stress on large-scale sets of data and could be incorrectly perceived as the one that deals with the collection of facts. Burns (2000) outlines four main characteristics that are typical of quantitative research, namely span of control, operational definition, replication and hypothesis testing. When conducting any type of research, control could be seen as an essential element that will enable the researcher to require explicit answers. If the causes of an event are sought, by eliminating the simultaneous influence of many variables no interference will occur. Moreover, providing an operational definition is a further way to minimise ambiguity and to provide contextual explanation of terms. In addition, an advantage of this type of research is that it is replicable research that could be further tested by repetition. Last but not least, quantitative research is the most applicable type of study that could be used for hypothesis testing and is subject to empirical testing. The main strengths of quantitative research could be summarized as the high control it allows, the precision of statistical techniques that could be used and the relationship between variables that could be found. Yet, some limitations of this approach have been identified. Burns (2000) claims that while a high degree of control allows researchers to find
14

unambiguous answers, the two impacts of one-sided control are that this type of research is not able to reflect peoples ability of interpretation and it often could be seen as a subjective study, pre-modified in a certain way by the researcher. In addition, a challenge for the researcher is to implement a high degree of control for all variables. An underlying assumption of this structured way of research is that the target group will respond in the same manner. Lastly, quantitative research has proved to provide too simplified and insignificant findings due to the restrictions imposed by the high level of control.

5.2.

Qualitative research

Delamont (1992) argues that qualitative research is a more time-consuming approach and is a task difficult to collect information for. Blaxter et al. (1996) claim that this type of research analyses non-numerical information that is often concerned more with the detail exploration, ideally leading to an in-depth understanding. Best and Khan (1989) argue that qualitative research is more responsive to its subject as well as open for interpretation. Burns (2000) argues that some of the main strengths regarding qualitative research are related to the closer insights that the researcher can acquire. The insider's view of the field also allows the researcher to identify less explored connections. Due to its non-numerical essence, the more narrative style allows the qualitative descriptions to play a vital role when identifying causal links and effects. If quantitative studies are often focused on the structured approach, the benefit of qualitative research is that it allows the researcher to examine more complexities within the subject of investigation. Some of the major criticisms refer the validity and reliability of the studies. Qualitative data is seen as one of subjective nature and lacking the opportunity to be replicated since events and conditions cannot be duplicated in the same manner. Apart from the research being a lengthy process, Burns (2000) raises the issue of anonymity and confidentiality. Even though the quantitative and qualitative research do not need to be used exclusively, the factors that often determine the choice of research are related to the nature of the research question and the way similar studies have been undertaken in the past.

5.3.

Primary research

Fisher and Buglear (2010) review the range of approaches of collecting data by plotting them along a continuum according to the level of structure involved. He argues that interview, panels, surveys and observations could be both in the form of an exploratory research or in the form of survey research. Structured and unstructured interviews As figure 6 illustrates, interviews could be undertaken in an unstructured way through openended questions where the researcher is seeking a range of opinions from the target group.
15

What characterizes this type of research is that respondents predominantly lead the direction of the interview. In contrast, a script-based interview which follows the already formulated questions set by the researcher is a controlled way of collecting data as a primary research approach. The semi-structured interviews, which are also referred to as critical incidents, are a researchers approach of conducting an interview that could be both formal and focused but also giving the chance for additional scope for discussion. Panels Similar to interview approaches, panels could also be used as an open or pre-coded method of conducting research. The Delphi technique is the opposite of traditional focus groups and as such it is a structured approach for developing a consensus about a future scenario. This technique is based on a two-tiered approach where pre-coded set of options is firstly given to a selected panel of members. Once these options are evaluated, the second round of the averages is provided for further evaluation and judgement. What Fisher and Buglear (2010) argue is that by a series of iterations, the panel of experts could arrive at a consensus. Questionnaires What distinguishes unstructured from structured questionnaires is whether there is a multiple choice answer sheet or whether participants can express their opinions in an open-ended format. Among the challenges for designing a questionnaire is the decision on the question format that could vary significantly from dichotomous, multiple-choice questions to checklists, rating scales, ranking questions, likers scales, semantic differential to open, leading, hypothetical and presuming questions. Figure 6. Unstructured and structured approaches to the main research methods

Source: Fisher (2010) Researching and Writing a Dissertation: An essential guide for business students, p. 175 Limitations The authors identify a number of limitations related to producing statistically significant results from collecting data. Among the major limitations of primary research is the insufficient sample size. Since the margin of error is seen as the per cent of uncertainty that the sample offers, a researcher often has to calculate what size of the margin of error will be acceptable.

16

Another significant obstacle to primary research is access to participants or the sampling frame as Fisher and Buglear (2011) suggest. Among the solutions for avoiding unrepresentative sampling is the usage of systematic sampling that could be in the form of quotas or fixed intervals. For example, applying a quota sampling could prevent uneven distribution regarding demographics. Apart from the technical obstacles, primary research is not a feasible approach for some theoretically-based studies.

5.4.

Secondary research

Early attempts to define secondary research see this type of analysis as the extraction of knowledge on a topic other than those which were the focus of the original survey. (Hyman, 1972) Moreover, Hewson (2006) adds to the initial definition that new interpretations and conclusions could be drawn from the existing dataset. Smith (2006) summarizes the types of secondary analysis as government reports, statistical reports, large-scale national surveys, administrative records, published theoretical work, suggesting that the potential for secondary data analysis is substantial and it could cover a range of topics that are to be explored. Densmuir and Williams (1992) suggest that dealing with secondary research could offer a number of advantages as well as research limitations. Secondary research is seen as the only approach that could examine large-scale industry or economic trends. In addition, for specialized studies that are based on historical data, secondary research is the only exploratory option. A further advantage is that it is often the most accessible and costefficient approach. The authors argue that a major concern of secondary research is whether data and context of the collection could be separated entirely, suggesting that this approach may be lacking perspective and could be partially biased and inaccurate. Despite the fact that secondary data is often seen as easily accessible, it could be argued that the choice of which data to be published officially by government officials or by company representatives will lead to a distorted picture of the researched subject.

5.5.

The rationale for methodology choice

Having elaborated the advantages and limitations of primary and secondary research as well as the pros and cons of analysing quantitative and qualitative data, three reasons for the choice of a research method are going to be discussed. Firstly, the option of collecting primary data has been dismissed due to the fact that no statistically significant data could have been collected from such research. Secondly, with a large pool of studies that have empirically tested the relationship between Chinas economic growth and the high FDI levels and many of those studies having replicated results, a further investigation of this type would have been unnecessary.
17

Lastly, the specificity of the topic, namely an attempt to identify a strong relationship between two economic variables, suggests that only by conducting a meta-analysis of existing empirical studies, this work will be able to illustrate whether such correlation exists. Moreover, the combination of a conceptual model, literature overview and analysis of empirical studies, effectively combines analysis of quantitative and qualitative data, an approach that produces viable outcomes.

5.6.

Research limitations and recommendations for further research

While the approach towards answering the research question has incorporated both theoretical discussion and analysis of numerical data, it could be argued that a limitation of the research is the number of empirical studies that have been considered. Due to the nature of the topic, no primary research was conducted. Hence the data analysis for the first hypothesis was based on four extensive empirical studies, conducted in the period 2001-2006. Despite the variety of statistical models that the authors have used, a broader range of studies might have presented a stronger relationship between the examined variables of FDI and economic growth. Another limitation of this research relates to the way the second hypothesis has been tested. While recent data from a number of official sources was used, namely National Bureau of Statistics of China; US Bureau of Labour Statistics; OECD, it could be argued that the lack of academic empirical studies on that topic has prevented the research to use a consistent method of hypotheses testing. A recommendation for further research would be conducting empirical studies that could statistically test what has been the speed of China losing its competitive edge as a low cost manufacturing hub. What could be further researched are the implications this trend has created to other industries and the effects on macro-economic factors such as currency fluctuations, wage disparities and economic growth.

6. DATA AND RESULTS 6.1. Hypothesis 1: FDI has had a positive impact on the Chinese economy

This section presents a meta-analysis of four extensive empirical studies that aim to illustrate whether there is a positive relationship between FDI and the countrys economic growth. The testing of the first hypothesis FDI has had a positive impact on the Chinese economy will be done through analysis of the regression results and drawing conclusions about the causalities between the selected variables. Study I Liu et al. (2002) undertake a study of the relationship between a selection of four variables: GDI, FDI, Imports and Exports. By using a Granger causality test, the authors aim is to find how exports, imports, FDI levels and GDP have been interrelated in the examined period 1981-1997. The choice of data consists of sources such as the International Financial Statistics Yearbook for the quarterly exports (EX) and imports (IM). Since no quarterly GDP
18

statistic data is available, estimation has been calculated, based on the monthly gross industrial output. Lastly, quarterly inward FDI data has been acquired from official sources such as China State Statistical Bureau. Liu et al. (2002) build a model (LFDI=-8.43+2.3LEX 1.04LIM + SD) that aims to exemplify the relationship between FDI, exports and imports where SD stands for seasonal dummy variables. An underlying assumption is that FIEs will be predominantly firms interested in exporting activities. It is argued that once the government initiative of promoting strictly export-oriented policies was weakened, after 1992 the substitution effect may have occurred. Liu et al. (2002) conclude that their results are consistent with previous findings suggesting that there is a causal link between growth, exports and FDI. What is left unresolved, though, is the argument that it is the countrys growth and foreign trade prospects that may have attracted FDI in the first place. Borensztein et al. (1998) suggest that the two-way causal links have been found in both developed countries (UK and Germany) and also in 69 developing countries. What distinguishes the study of Liu et al. (2002) though is that they find no evidence that the surge in FDI in the early 1990s has been reflected in GDP growth, export growth or import substitution. The authors suggest that the lack of visible spill over effects of FDI boosting the economy could be explained by the fact that FDI levels had small aggregate levels, unable to create an economic impact at this early point. Since the government was removing administrative barriers in order to enable strong export promotion, total exports were substantially uplifted, accounting for 41% in 1997. Therefore, it is far from unexpected for a two-way causal relationship between exports and FDI to be found. However, the authors argue that only a one-way causal link exists, suggesting that economic growth, export expansion and inflows of FDI affect imports in the short run, rather than the other way round. The possible reason for this is that the Chinese government still restricts imports through tariffs and non-tariff barriers. This may cause economic distortion and inefficiency as Corden has previously suggested (1997), so that the immediate effect of imports on GDP, FDI and exports is likely to be too small to be visible at the aggregate level. Study II Berthelemy and Demurger (2000) conduct a similar study, investigating the relationship between foreign direct investment and economic growth. The authors introduce a model that is based on the endogenous economic theory, implying that there are a number of internal factors that could have boosted the economic growth. Moreover, among their deductions is that increase in economic growth could have equally attracted foreign capital in the country. Their study is based on a sample data in the period 1985 - 1996 as 24 Chinese provinces are considered. The authors use a log-linear approximation that is based on the common elements of a production function. What is included as variables that could be related to GDP growth are
19

the accumulation of labour, domestic and human capital. Due to lack of reliable sources of information regarding human capital in China, Berthelemy and Demurger (2000) use the relevant estimates for population that has been in education in each of the examined provinces. It is believed that export expansion could have been a driver for growth and the factor is considered as an element that could improve efficiencies through economies of scale. With all factors in consideration, the estimated growth equation [Gy = A0 +A1GL +A2 SI +A3 SFI +A4 GExp +A5h +A6H* SFI ] takes Gy as the GDP annual growth rate, G1 as the labour growth rate, S1 as the fixed assets investment to GDP ratio, Sfi as the foreign investment to GDP ratio, Gexp as the exports growth rate and H as the percentage of people who have completed primary or secondary education. In Berthelemys and Demurgers study (2000) the results from the GDP equation replicate to some extent the previous conclusions regarding the role of FDI in China for the examined period. The overall impact of FDI is found to be higher than anticipated due to the findings related to the role of human capital. The authors empirical study concludes that in provinces with higher share of educated people, the foreign investment is higher. With regards to the effect on foreign trade, contrary to previous findings, no positive relationship has been found. Labour growth is found consistent with previous findings, namely having an elasticity around 0.3 which is below the established 5 per cent level that otherwise would have been seen as significant. A few significant determinants have been found when the foreign investment equation is analysed. Firstly, the degree reforms, openness, GDP and infrastructure of development at a provincial level are found to influence investors interest. In addition, what is seen as more attractive for investors are provinces where there isnt much state-owned dominance in the sector they are willing to enter. These findings are consistent with previous conclusions, such as Primes and Parts (1995), where a cumulative process between FDI and growth has been found and this implies that foreign investors are interested in already strongly growing areas. Study III Zhang (2001) undertakes another study which empirically investigates if and how foreign direct investment affects economic growth. By using methodology similar to what Levin and Raut (1997) have used, the author builds a model including labour input, stock of domestic capital, stock of FDI and total factor productivity level. He modifies the model by including a number of potential exogenous influences such as a coefficient of changes in the ratio of the FDI to GDP ratio. According to Barros and Sala-i-Martins (1995) models two additional variables are added: initial development levels as well as human capital.

The equation constitutes the basis for the cross-section and panel analyses in the 1984-1998 period at provincial levels. According to Zhang (2001) the skewed geographic patterns are

20

partially explained by the open-door policy exclusively in the coastal areas, which has been taken into consideration when seeking the patterns of FDI and economic growth in China. Table 1 in Appendix 1 illustrates the FDI inflows as well as how GDP has grown in each province in the examined period from 1984 to 1998. The choice of this time frame to be examined is explained by the lack of information for the FDI levels per province before that period. Within the first 5 years GDP has grown with the phenomenal 12 per cent, followed by a deceleration to 8 per cent and followed up by an increase to 9.5 per cent in the last five years. What Zhang (2001) does is to disregard the effect of FDI and examine in each of the three 5year periods, what would have been the level of growth rate of population (L), human capital (H), domestic investment/output ratio (I/Y) and the FDI/output ratio (I/Y) without the effect from FDI. As previous examined studies have done, a regional dummy variable (D) is added to balance out the regional discrepancies between rural and urban provinces. Figure 7. Results of cross-section estimations: 1984-1988; 1989-1993 and 1994-1998

Figure 8. Results of panel estimations: 1984-1998

21

What the results from both the cross-section and the panel data demonstrate is that FDI has been one of the factors that have affected the Chinese economy. As Lardy (1995) has suggested, productive foreign capital affects the economic growth in a positive way, which is replicated by the results in both Figure 7 and 8. In terms of the externality effects of FDI, apart from the first examined 5-year period, the results suggest that the presence of FIEs has been a driver for the facilitation of Chinas transition. The examined relationship between FDI and human capital demonstrates that there are complementary effects between the two variables. Another observation is the increase of the effects of FDI in the second 5-year period under examination, represented by a 44 per cent increase in the coefficient. The increasing value of the coefficient of the dummy variable D supports the argument that the higher levels of FDI in the coastal areas are beneficial for the economic growth of those provinces. Lastly, Zhang and Markusen (1999) argue that for foreign firms to be able to offset the disadvantages of operating abroad, they should be in possession of a specific competitive advantage such as superior technology. Demonstrated by the larger differences between domestic and foreign investments, Zhang (2001) concludes that the results support the theory which argues that domestic capital should be lower than FDI. In conclusion, Chinese official estimations suggest that within the 1980 - 1999 period more than 27 per cent has been contributed from foreign-invested enterprises, reinforcing the findings of the positive effect of FDI on the Chinese economic growth. Study IV Yao (2006) examines further the relationship between economic growth, FDI and exports in China by using a large set of data on 28 Chinese provinces in the 1978-2000 period. The authors model follows the Cobb-Douglas technology which determines output as the input of labour and capital As figure 9 illustrates, the model used has been expanded so that it includes a number of variables regarding the international environment, namely human capital, infrastructure, etc. and the essential external environment variables FDI, exports and exchange policy.
22

Figure 9. A production process with internal and external environments

. Source: Yao (2006) On economic growth, FDI and export in China, Applied Economics, vol. 38, pp. 339-351 The results demonstrate a number of correlations between variables. For example, a statistically significant causal link is found between GDP and the examined coefficients of labour, physical and human capital, exchange rates and exports. Having expanded the initial model, results illustrate that apart from capital and labour, the majority of internal and external factors have affected GDP rates as figure 10 illustrates. Figure 10. Regression results based on 28 Chinese provinces in 1978-2000

Source: NBS (1996), NBS (1997-2002) Location has been found to be an insignificant factor regarding GDP, probably explained by the large differences in regional productivity, but is seen as essential in the context of the
23

export-oriented strategy. In addition, real exchange rate has been found to affect exports to a large extent. Regarding FDI and GDP, the study has treated FDI as a function of GDP, nominal wages, real exchange rate, transportation, human capital and location. What has been found to affect significantly FDI, are the location factor and the real exchange rate, suggesting that Eastern areas have been more effective in attracting FDI. The study also examines whether wage differences have affected the degree of investment received by foreign firms, but no correlation has been demonstrated through the analysis of results. With an elasticity of 0.817 FDI is seen as being determined by GDP and Yao (2006) argues that FDI, exports and GDP have a synchronized relationship, which confirms findings of previous studies. Described as a virtual circle of openness and growth, the author suggests that the interaction of the three variables have been the driver for both the attractiveness for foreign firms to operate in China and also as the driver for the countrys economic growth.

6.2.

Hypothesis 2. China is losing its edge as a low cost centre for manufacturing

Indented or emerging strategy: Chinas move away from being the worlds largest low cost manufacturing hub It could be argued that what brought the majority of FDI inflows in the country since the reforms were the attractive conditions that enabled China to become the world largest low cost manufacturing hub. Preeg (2003) argues that because of the unique combination of a large human resources pool, low wages as well as undervalued currency and duty exemptions for foreign firms, the highly promoted export mechanisms drove to a large extent the growth of the Chinese economy in the past. KPMGs report, discussed by BBC (2011) suggests that China has been losing its edge as a low-cost manufacturer which could be interpreted in a number of ways: as an intended government strategy or as a natural end of a cycle. Berger (2011) undertakes an extensive study of the trends regarding the evolution of low cost manufacturing in China. He argues that the low cost manufacturing cycle could be coming to an end, following the erosion of Chinas biggest competitive advantage: the cost of doing business. While Fig. 11 demonstrates double digit wage rate growth not only for three of Chinas most developed regions, but for the country in general, Fig. 12 exemplifies that the trend of an accelerating cost of production, shown by the Production Prices Index, will make China less competitive. In fact, the projected growth of production in the period 2010-2015 is believed to reach 75% increase, compared to the previous examined period 2000-2010. These forecasts reiterate the belief that MNEs will choose locations where manufacturing can still be achieved at a lower cost, example of which is Roberts (2008) discussion about Vietnam,

24

offering cost of labour half the one in China as well as the fact that India has been accommodating more and more factories that have been relocated from China. Fig. 11. Labour rate inflation 2002-2009 Fig 12. Production Prices Index in manufacturing

Sources: National Bureau of Statistics of China; US Bureau of Labour Statistics; HIS Global Insight, OECD

Roberts (2008) argues that the time of below-average labour cost and lack of strict directives are gone and the trend of rising manufacturers costs is irreversible. If in the past the Pearl River Delta region was the area attracting the largest number of foreign multinationals, it is argued that the rising costs are pushing firms to explore markets either outside of China or in its more rural areas, where cost leadership could still be achieved. In addition, it is argued that due to the pressure from the USA which is suffering from a trade misbalance, the notoriously undervalued Chinese currency has been appreciating, hence shrinking significantly the margins of thousands of manufacturers. Lastly, the changes in the demographic structures in China, specifically the effects of the implemented one-child-policy, are seen as a major threat. As Fig. 13 illustrates, not only a reduction of the workforce by 100 million is anticipated by 2030, but Chinas aging population will increase the complexities of conducting business there. (Berger, 2011) With 42% growth in the footwear industry in Indonesia in 2010 and 42% growth in textiles in 2011 for Bangladesh, BBC (2011) argues that while China may not completely lose its status of a manufacturing hub, companies in certain sectors will be forced to change their strategy. Figure 13. Population by age group (%)

25

Source: The Brooklyn Institute, Ronald Berger

Alternatively, the move away from a low cost manufacturing could be seen as an intended initiative undertaken by the government that has been promoted by both Chinas Five-Year Plan as well as by the Pearl River Delta Redevelopment Plan. (Berger, 2011; Forbes, 2012) From the perspective of the countrys Five-Year Plan, the refocusing from a low- to a highend manufacturing will be an answer for tackling some of the currents environmental issues that have been addressed as a priority. Forbes (2012) argues that seven industries will be receiving more state aid support with the aim of creation of new markets for international investors, hence changing the course of the FDI inflows towards more advanced, eco-friendly sectors. From alternative automotive fuels to biotechnology, renewable energy and materials, the report illustrates Chinas intention to move significantly towards high-end manufacturing where not the volume but the industry concentration of FDI will matter. Moreover, relating those strategic plans to the countrys GDP, forecasts predict that by 2020 the newly prioritized areas will be contributing to the GDP by 15 per cent. In addition, the Pearl River Delta economic redevelopment plan that aims at relocating some of the non-core industries by 2020, reiterates the belief that Chinas move away from low cost manufacturing is an intended strategy. Berger (2011) summarizes that among the goals for a redeveloped economy are the process of phasing-out labour intense companies that are adding low value to the overall competitiveness; the removal of separate clusters and the increase of interlinks between them; the refocus on advanced high tech manufacturing projects; the enhancement of educational and health services that will contribute to the societys welfare. All these changes included in the Pearl River Delta economic redevelopment plan should lead to the creation of a global business centre which accommodates advanced manufacturing. In conclusion, the testing of the hypothesis has demonstrated an explicit trend of a move away from low cost manufacturing. Despite the observed trend of China losing its edge of a low cost manufacturing hub, it could be argued that the new focus on developi ng industries
26

that are both economically feasible and more environmentally friendly, could bring China a new competitive advantage. By dismissing some of the low value adding sectors, China can address the long-standing issues raised by American environmental watchdog groups and possibly divert the recent scrutiny on its notoriously undervalued currency. Lastly, the anticipated effects on the levels of FDI do demonstrate that the shift in type of manufacturing could contribute significantly to the countrys economic growth, a strategy that could divert the trend of the slowed down FDI inflows.

7. CONCLUSIONS
The main aim of this dissertation has been to investigate the link between foreign direct investment and Chinas economic growth, identifying whether it is a positive relationship, a synchronized relationship or a negative one. Although Chinas economic success has been an object of numerous studies, this research offers an original approach comprising broad literature overview, meta-analysis of empirical studies and analysis of quantitative and qualitative data, all aiming to answer the research questions and the pre-set hypotheses. The conceptual model outlines the focus of research and has categorized the areas of impact as six key factors that will be used to determine the outcome of the study, namely level of market transition achieved, government incentives, asymmetrical regional development, round-tripping, the exchange rate policy and the employment opportunities. Some of the conclusions that could be drawn from the extensive literature are that while the Chinese economy has benefited substantially from the rising foreign interest of investors, there have been downsides related to wage disparities, suppression of local firms and no actual increase on the employment opportunities. The discussion that evaluates the FDI stages China has progressed through and the evolvement of entry modes has indicated that since the reforms the Chinese government has undertaken a number of steps to encourage economic growth through easing the mechanisms for foreign investments. The trade liberalization process might have increased the competitiveness substantially, but it has also widened the gap between the rich coastal areas and the poorer rural areas. The renowned round tripping mechanism has enabled Chinese firms set up in tax havens such as Hong Kong to gain the advantages provided in the form of government incentives but has also artificially inflated the FDI levels. One of the main drivers for the exceptionally well working export strategy of China has been its undervalued currency, which has been under scrutiny and criticism for creating trade deficits in other countries. In addition, the undervalued currency has put in a disadvantaged position those willing to import goods. While it could be assumed that higher FDI levels have increased employment opportunities, the mixed results have shown that foreign investing enterprises have only changed the demand for workers in certain industries. For example, a trend of increased the demand for workers in the secondary and tertiary industries has been observed. Taking the broader perspective, the last conclusion that could be drawn from the changing ratio of inward and outward FDI is that China has been moving along the Investment Development Path, which implies that the country will be strengthening its position of an investor and weakening its position of a recipient of investments.
27

The analysis of the empirical studies as a test of the first hypothesis demonstrates that while a positive correlation has been found between FDI and economic growth, this relationship has been mainly synchronized. The first study shows that there is a positive relationship between FDI and economic growth, but the unresolved issue is whether the countrys growth and foreign trade prospects may have attracted FDI in the first place. On the other hand, the second empirical study concludes that with regards to the effect on foreign trade, contrary to previous findings, no positive relationship has been found. Still, in provinces with higher share of educated people, the foreign investment has been found to be higher. A supportive piece of evidence of the overall conclusion is that a cumulative process between FDI and growth has been found, implying that foreign investors have been interested in already strongly growing areas. On the contrary, the third study suggests a strong positive relationship between FDI and growth, where the contribution of foreign investing enterprises towards the GDP has been more than 27% in the examined period of time. Lastly, the fourth examined study replicates previous findings that FDI, exports and GDP have a synchronized relationship and the growth effects have been interrelated. The second hypothesis testing has explicitly shown that Chinas move away from being the worlds largest low cost manufacturing hub is an emerging trend. The discussion suggests that this move is either a strategic government initiative, a move along a natural cycle or a mixture of both where a strategy is embracing a naturally occurring tendency. The arguments for the existence of a natural cycle include the substantial wages increase, the overall rise in production costs and the trend of multinationals downsizing their activities in China and moving to new, more cost-effective locations. This numerical evidence combined with the demographics showing a downward trend of available workforce for the future suggests that China may be losing its current competitive advantage as a low cost manufacturing hub. Alternatively, this change has also been seen as a strategic refocus towards a more valueadding large-scale business initiative. Chinas Five-Year-Plan and the Pearl River Delta Redevelopment Plan do imply that by concentrating on higher-end manufacturing industries such as renewable energy and biotechnology, China can find solutions for the large environmental issues that have been exacerbating due to the heavy low-end manufacturing investments. While evidence has not been conclusive it could be argued that regardless of the main driver of this change, China can benefit more from economically feasible and environmentally friendly future investments compared to its current focus, a move that can make Chinas investment strategy a sustainable competitive advantage.

8. RECOMMENDATIONS
China entering a post- low manufacturing cost era may be an indication of the governments ability to sustain its competitive advantage, but it also suggests that businesses, both foreign and local, will have to respond and adapt their long-term strategies. The following managerial implications are related to two major trends in China: the move along the Investment Development Path and the move away from low cost manufacturing. The former trend suggests that China may soon start losing its status of an emerging economy since the ratio inward-outward FDI has demonstrated that China is increasing its power as an
28

investor and losing its previous status of an attractive FDI destination. What could change this tendency though are the prospects of Chinas Five-Year-Plan, namely the opportunity to refocus on more value-adding activities such as high-end manufacturing and sustainable ventures. It could be argued that the move away for low cost manufacturing could be the answer not only to many of the countrys environmental criticisms but it could be an alternative way for keeping the inward FDI levels high, while increasing the outward FDI. For a MNE, intending to set up its manufacturing facilities in China, the changing environment will impose the challenges of dealing with shrinking margins, stricter regulations and questionable currency stability. For a MNE, operating in China, the trends will question the feasibility of the manufacturing facilities location as well as the long-term strategy of the firms. In conclusion, it is important to highlight that while some of these trends could be observed predominantly in the coastal areas, many of the rural parts are yet to experience the full capacity of inward FDI they can potentially attract. This implies that due to the size of the economy, the difference in growth rates and the different specialization clusters, China could be the single example of a country that can fall into more than one development and FDI stages.

29

9. REFERENCES:
Anderlini, J. (2013) Foreign direct investment in China falls, Financial Times [Online] Available at http://www.ft.com/cms/s/0/5537736c-5fc8-11e2-8d8d00144feab49a.html#axzz2IX8ZyjWU, Accessed on 20 January 2013 Ali, S. and Guo, W. (2005) Determinants of FDI in China, Journal of Global Business and Technology, Vol. 1, pp. 21-33 Barro, R.J., and Lee, J.W. (1993) International comparisons of educational attainment, Journal of Monetary Economics, Vol. 32, pp. 363-394 BBC (2011) China 'losing edge' as low-cost manufacturer, says KPMG, Available at http://www.bbc.co.uk/news/business-14926728, Accessed on 24 March 2013 Berthelemy, J.C. and Demurger, S. (2000) Foreign Direct Investment and Economic Growth: Theory and application to China, Review of Development Economics, Vol. 4, Issue 2, pp. 140-155 Best, J. and Khan, J. (1989) Research in Education, Englewood Cliffs (NJ), Prentice Hall Blaxter, L., Hughes, C. and Tight, M. (1996) How to Research, Buckingham, Open University Press Borensztein, E., Gregorio, J. and Lee, J-W. (1998) How does foreign direct investment affect economic growth, Journal for International economics, Vol. 45, pp. 115-135 Buckley, P. and Meng C., (2005) The Strategy of Foreign-invested Manufacturing Enterprises in China: Export-orientated and Market-orientated FDI Revisited, Journal of Chinese Economic and Business Studies, Vol. 3, No. 2, 111-131, May Burns, R. (2000) Introduction to Research Methods, London, Sage ChinaDaily (2012) China the largest FDI recipient for the first half of 2012, Available at http://www.chinadaily.com.cn/china/2012-10/24/content_15840596.htm, Accessed on 8 November 2012 Chen, B and Feng, Y. (2000) Determinants of economic growth in China: Private enterprise, education, and openness, China Economic Review, Vol. 11, pp. 1-15 Corden, W. M. (1997) Trade Policy and Economic Welfare, 2nd ed., Clarendon Press, Oxford Deng P. (2001) WFOEs: the most popular entry mode into China, Business horizons, pp. 6372 Delamont, S. (1992) Fieldwork Perspectives, London, Falmer in Educational Settings: Methods, Pitfalls and

30

Dunning, J.H. (1988), The eclectic paradigm of international production: a restatement and some possible extensions, Journal of International Business Studies, Vol. 30, pp. 1-31 Dunsmuir, A. and Williams, L. (1992) How to do social research, Sociology in action series, London: Collins Educational. Fisher, C. and Buglear, J. (2010) Researching and Writing a Dissertation: An essential guide for business students, Pearson Education, 3rd Edition Forbes (2012) Chinas Five-Year Plan: Rewriting its reputation with a focus on emerging industries, Available at http://www.forbes.com/sites/bmoharrisbank/2012/12/14/chinas-fiveyear-plan-rewriting-its-reputation-with-a-focus-on-emerging-industries/, Accessed on 24 March 2013 Ford, J. L., Sen, S. and Wei, H. X. (2010) FDI and Economic Development in China 19702006: A Co-Integration Study, Discussion Paper, University of Birmingham, Birmingham Frankel, J. (2006) On the Yuan: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate, CESifo Economic Studies, Vol. 52, pp. 246-275 Hewson (2006) Internet research, The SAGE Dictionary of Social Research Methods Hyman, H. (1972) Secondary analysis of sample survey: principles, procedures and potentialities, p. 347 Jones, D., Li, C and Owen, A. (2003) Growth and Regional Inequality in china During the Reform Era, the William Davidson Institute at the University of Michigan Business School Kosack, S. and Tobin, J. (2006) Funding Self-Sustaining Development: The Role of Aid, FDI and Government in Economic Success, International Organization, Vol. 60, pp. 205-243 National Bureau of Statistics (NBS) (1996) China Regional Economy: A Profile of 17 Years of Reform and Open-Up, China Statistical Press, Beijing National Bureau of Statistics (NBS) (19972002) Statistical Yearbook of China (various issues), China Statistical Press, Beijing Lau, C.M. and Bruton, G.D. (2008) FDI in China: What we know and what we need to study next, Academy of Management Perspectives, pp. 30-44 Levin, a. and Raut. L. (1997), Complementarities between Exports and human Capital in Economic Growth: Evidence from the Semi-industrialized Countries, Economic Development and Cultural Changes, Vol. 46, Issue 1, pp. 155-174 Litwack, J.M. and Qian, Y. (1997) Balanced or Unbalanced Development: Special Economic Zones as Catalysts for Transition, Journal of Comparative Economics, Vol. 26, pp. 117 141

31

Liu, L. (2012) FDI and employment by Industry: A Co-Integration Study, Modern Economy, Vol. 3, pp. 16-22 Liu, X., Burridge, P. and Sinclair, P. (2002) Relationships between economic growth, foreign direct investment and trade: evidence from China, Applied economics, Vol. 34, pp.1433-1440 National Bureau of Statistics (NBS) (1996) China Regional Economy: a Profile of 17 Years of Reform and Open-Up, China Statistical Press, Beijing National Bureau of Statistics (NBS) (19972002) Statistical Yearbook of China (various issues), China Statistical Press, Beijing OECD (2000) Main Determinants and Impacts of Foreign Direct Investment on China's Economy, Working Papers on International Investment, Vol. 4 Preeg, E.H. (2003) Dollar overvaluation and the world economy, Institute for International Economics, p. 267 Prime, P. B. and Park, J. H. (1995) Export Performance and Growth in China: A CrossProvincial Analysis, unpublished Ren, J. and Pentecost, E. (2007) The Determinants of Foreign Direct Investment in China, Economic Department, Loughborough University Roberts, D. (2008) Chinas Factory Blues, Bloomberg Businessweek, available at http://www.businessweek.com/stories/2008-03-26/chinas-factory-blues, Accessed on 24 March 2013 Rozelle, S. (1994) Rural industrialisation and increasing inequality: emerging patterns in Chinas reforming economy, Journal of Comparative Economics, Vol. 19, pp. 362-91 Schlevogt, K. (2000) Doing business in China (I): the business environment in China-getting to know the next centurys superpower, Thunderbird International Business Review, Vol. 42, pp. 6389 Simpson, S. (2011) How Will China's Currency Moves Affect The U.S.?, Available at http://www.investopedia.com/financial-edge/1011/how-will-chinas-currency-moves-affectthe-u.s.aspx#ixzz2CUrirNRE, Accessed on 17 November 2012 Smith, E. (2006) Using secondary research on Educational and Social research, Open University Press, McGraw-Hill Education Stohldreier, M. (2009) the Impact of Foreign Direct Investments on Economic Growth in China during the Era 1979-2009, Institute for Empirical Research in Economics at the University of Zurich Sun, Q., Tong, W. And Yu, Q. (2002) Determinants of foreign direct investment across China, Journal of International Money and Finance, Vol. 21, pp. 79-113
32

Tseng and Zebregs (2002) Foreign Direct Investment in China: Some Lessons for Other countries, International Monetary Fund Walliman, N. (2005) Your research Project: Step-by-Step Guide for the First-Time Researcher Whalley and Xin (2006) Chinas FDI and non-FDI economies and the sustainability of future high Chinese growth, NBER working paper series No. 12249 Xing, Y. and Wan, G. (2006) Exchange rates and competition for FDI in Asia, The World Economy, Vol. 29, issue 4, pp. 419-434 Xing, Y. (2006) Why is China so attractive for FDI? The role of exchange rates, China Economic Review, Vol. 17, pp. 198-209 Xu, Y. (2001) China's exchange rate policy, China Economic Review, Vol. 11, pp. 262277 Yao, S. (2000) Economic development and poverty reduction in China over 20 years of reforms, Economic Development and Cultural Change, Vol. 48, pp. 44774 Yao, S. (2006) On economic growth, FDI and export in China, Applied Economics, vol. 38, pp. 339-351 Zhang, E. Z. and Ren, Z. C. (2005) FDI and the Evolution of Chinas Employment Structure, Economics Theory and Management, Vol. 2, No. 52005, pp. 1-7 Zhang, K.H. (2001) How does Foreign Direct Investment affect Economic Growth in China, Economics of Transition, Vol. 9, pp. 679-693 Zhang, K.H. and Song, S. (2001) Promoting exports: the role of inward FDI in China, China Economic Review, Vol. 11, Issue 4, pp. 385-396

33

10. APPENDIX 1
Table 1. FDI flows and GDP growth rates in china by province, 1984-1998

Sources: Data for 1984-1995, China Regional Economy (1996); Data for 1996-1998, china statistical Yearbook (1997-1999)

34