foreign direct investment in china and india development

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Foreign direct investment in china and india development principles of investments pdf

Foreign direct investment in china and india development

Grossman, G. Google Scholar. Grub, Ph. Harding, H. Huang, D. Hussain, A. Hsiao, Ch. Kamath, S. Li, K-W. Liang, Y. Liu, X. Wei, Y. Markusen, J. Romer, P. Shi, Y. Wei, S-J. Woo, W. World Bank Yue, C. Zang, X. Download references. FFEs that export at least 70 percent of their annual output remain eligible for a 50 percent reduction after these five years.

Advanced- technology FFEs receive a 50 percent reduction for 3 years after the initial 5 years. FFEs: 18 percent 1 and the same 2-year exemption, 3-year reduction as under the standard income tax regime. Export-oriented and advanced technology FFEs pay 10 percent instead of 15 percent after the initial 5-year exemption and reduction period has expired.

FFEs engaged in infrastructure projects in Hainan airports, harbors, docks, railroads, highways, power plants, and water conservation and with contracts for operating periods of 15 years or more are eligible for a 5-year exemption period followed by 5 years at a reduced rate 10 percent instead of 15 percent after the first profitable year. FFEs: 27 percent 1 and the same 2-year exemption, 3-year reduction as under the standard income tax regime.

FFEs: 18 percent 1 for all production-related FFEs, with the same 2-year exemption, 3-year reduction as under the standard income tax regime. FFEs: 18 percent 1 and the same exemptions and reductions as under the standard income tax regime for high or new technology enterprises. OEZs have played a central role in the gradual opening of the economy to foreign investors. In the early reform period, one important difference between the OEZs and other areas in China was the administrative decentralization that permitted investment decisions in the OEZs to be taken largely outside the state plan.

Local authorities in the OEZs were allowed to attract foreign investors through preferential policies. They were also allowed to undertake their own infrastructure development and other investment as long as they could raise the funds from taxation, from profits of the enterprises they own wholly or partly, or from banks in the zones.

Although the zones have provided favorable business conditions, a number of important constraints—such as restricted access to foreign exchange and domestic markets—remained in place in the early reform period. This largely limited the business scope of foreign enterprises to export-oriented activities.

When these restrictions were eased in the second half of the s, foreign investors gradually gained access to the domestic market and, as a result, links with the domestic economy increased. The international empirical evidence on the impact of preferential policies on FDI flows is mixed, and more work is needed to assess the impact in the case of China.

Reforms were initially confined to certain localities and FFEs and gradually extended more broadly. In this environment, the success of OEZs in China suggests that preferential policies were useful in catalyzing economic development and attracting FDI. In the absence of preferential policies, FDI would likely to have been substantially less, given the restrictive environment in which Chinese enterprises outside the OEZs had to operate.

Thus, it can be argued that preferential policies yielded a net gain to the economy—by allowing reforms to take hold and by attracting FDI which contributed to output growth. However, over time as the reform process advanced, preferential policies created distortions and inequities, particularly a complex and biased tax system and regional income disparities, that need to be addressed.

Shared cultural background. While many other countries do not share this characteristic, it could be argued that the large share of nonresident Chinese in FDI flows into China is a reflection of distortions rather than a unique advantage.

Cultural barriers, such as the language, which prevent foreign investors from entering China, could be a sign that the investment climate is too difficult for outsiders, which implies a cost. Corruption and legal environment. These are two important factors that have been found significant in explaining FDI to many countries.

The ambiguity in the law has, in turn, contributed to corruption. China scores relatively low on corruption and governance indicators in international comparisons Chart 5. Familiarity with the local culture helps in passing bureaucratic hurdles and that is one of the reasons why investors from Europe and the United States have often sought local counterparts. One study found that China could attract more FDI from Europe and the United States were it not for the implicit tax imposed by bureaucratic hurdles.

Output of FFEs in the industrial sector has expanded at four times the rate of other industrial enterprises during , while their labor productivity is almost two times that of public sector enterprises. In addition, empirical research has found that domestic enterprises appear to have benefited from the presence of FFEs, both through increased sales and positive spillovers.

These externalities are thought to have become progressively more important as more links began to develop between FFEs and domestic enterprises in the s. FDI has created employment opportunities. The creation of employment opportunities—either directly or indirectly—has been one of the most prominent impacts of FDI in China.

FFEs are particularly important employers in the coastal provinces, accounting for over 10 percent of urban employment in Guangdong, Fujian, Shanghai, and Tianjin as of FDI has built a highly competitive and dynamic manufacturing sector for exports. Between and , the share of exports accounted for by FFEs grew from 1 percent to 45 percent; FFEs accounted for half of overall export growth and one-third of import growth during this period.

Although part of the FDI flows from these economies may be induced by distortions, the fact remains that, together with Singapore, they have accounted for more than half of the FDI flows to China. Apart from the economic environment, political commitment is an important ingredient in attracting FDI. It was shown, for example, that India shares with China many of the structural factors that have been important determinants of FDI—market size, abundant labor, and a large Indian Diaspora.

So, a priori, there seems to be no reason why India could not become an attractive destination for FDI if it so chooses. There is of course a big difference in how political choices are made among countries. In China, the political leadership imposed a vision for the path of growth and development of the country. Nevertheless, China had to overcome the obstacles to FDI rooted in history and ideology. The political leadership did so by limiting the opening to a few localities initially, but even then, a great deal of autonomy in economic decisions was given to the localities—allowing a market-based economy to develop alongside a centrally planned system.

Although this decentralization created some problems, it also gave local authorities strong incentives to grow and develop their economies. The success of the initial experiments created strong demonstration effects, which induced broad support for further reforms and opening up.

This created a virtuous cycle as reforms produced economic fruits, support for reforms became more widespread, allowing more reforms to be implemented. The effect is likely to be strongest if foreign enterprises develop close links with domestic enterprises, so that the impact of FDI on productivity growth is extended beyond the firms receiving FDI.

WTO accession is expected to lead to a continuation of these contributions as FDI can be expected to increase, particularly in the services sector, such as finance, telecommunications, and wholesale and resale commerce. FDI will continue to be an important source of growth and will help offset potential output losses and create employment opportunities for workers that have become redundant in state enterprise and banking reforms. It is significant that the Chinese authorities have invited foreign participation in the restructuring of state-owned enterprises and the resolution of the nonperforming loan problems in the banking sector.

In particular:. Chen C. Cheng L. Head K. Liu X. Song Y. Wei and P. Wall D B. Jiang and X. Wei S. Zhang K. A version of this paper was presented at a seminar held at the Department of Industrial Policy and Promotion in Delhi, India on November 12, Harrold and Lall , Lardy , and Wei Under an equity joint venture, Chinese and foreign investors operate the venture and share the risks, profits, and losses jointly.

All parties involved agree on the equity share of each party. Profits are distributed to the parties in proportion to their equity share. Both parties decide on the proportions in which products, revenue, and profits are distributed. A wholly foreign-owned venture is wholly owned by foreign investors. Cheng and Kwan and Liu et al. Cheng and Kwan , Liu et al. Zebregs and Zhang Cheng and Kwan , and Head and Ries Open economic zones include SEZs, open coastal cities, and various development zones.

For a taxonomy of the different types of zones see Box 1 and Wall, Jiang, and Jin Cheng and Kwan and Head and Ries It is difficult to measure the indirect employment effects of FDI; these include the employment indirectly generated as a result of spending by FFEs, or as a result of linkages of FFEs with domestic enterprises, either as competitors or as suppliers and customers. User Account. IMF eLibrary. Advanced search Help. Kitts and Nevis St.

Lucia St. Public Health Health Policy. Print Citation Alert off. Get Code Buy. This paper examines China's experience with FDI and identifies some lessons for other countries. Most of the factors explaining China's success have also been important in attracting FDI to other countries: market size, labor costs, quality of infrastructure, and government policies. FDI has contributed to higher investment and productivity growth, and has created jobs and a dynamic export sector. China's success, however, did not come without some pitfalls: an increasingly complex tax incentive system and growing regional income disparities.

Introduction II. Show Summary Details I. I ntroduction 1. Table 1. Chart 1. China: FDI Inflows Table 2. Source: Statistical Yearbook of China. Chart 2. Chart 3. Chart 4. China: Forma of FDI. Table 3. Table 4. Economic Structure Table 5. China: Infrastructure Indicators Power Electric power consumption kwh per capita Source: World Bank, World Development indicators. Reduced Barriers and Preferential Policies Key laws and regulations on FDI The legal framework for FDI has been progressively codified and clarified: Law on Joint Ventures Using Chinese and Foreign Investment provided a basic framework for the establishment and operation of foreign economic entities.

Open Economic Zones in China 1 Since the beginning of economic reforms, a variety of open economic zones have emerged, which have offered a more liberal investment and trade regime than other areas, as well as special tax incentives. Open Coastal Cities OCCs In , 14 cities in the coastal regions with already established industrial bases and infrastructure became OCCs and were opened to foreign investment.

Tax Incentives for FDI China has extensively but selectively used tax incentives to guide FDI into designated regions, economic sectors and industries. Special Economic Zones Domestic enterprises: 18 percent FFEs: 18 percent 1 and the same 2-year exemption, 3-year reduction as under the standard income tax regime. Economic and Technology Development Zones Domestic enterprises: 18 percent FFEs: 18 percent 1 for all production-related FFEs, with the same 2-year exemption, 3-year reduction as under the standard income tax regime.

High Technology Development Zones Domestic enterprises: 18 percent FFEs: 18 percent 1 and the same exemptions and reductions as under the standard income tax regime for high or new technology enterprises. Cultural and Legal Environment I mpact of FDI in C hina This effect is estimated to have contributed about 0. The direct contribution of FDI to GDP growth has been highest in provinces that have attracted most foreign investment and ranged from almost 4 percentage points per year in Guangdong to negligible amounts in most inland provinces.


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A foreign direct investment happens when a corporation or individual invests and owns at least ten percent of a foreign company. The BEA tracks U. Many developing countries need FDI to facilitate economic growth or repair.

International trade agreements have paved the way for increasing FDI flows. FDI has benefited countries through:. But FDI can become a disadvantage when:. In an increasingly globalized economy, the opportunities for foreign direct investment is growing. Investing abroad may be very financially rewarding, but also consider that such investment carries weighty risks. Existing Definitions. Accessed Feb. International Monetary Fund. Tax Foundation. Congressional Research Service.

United Nations. The World Bank. Securities and Exchange Commission. Page United Nations Conference on Trade and Development. Bureau of Economic Analysis. Bear Market Basics. Full Bio Follow Linkedin. Follow Twitter. Kimberly Amadeo has 20 years of experience in economic analysis and business strategy. She writes about the U. Economy for The Balance. Read The Balance's editorial policies.

Reviewed by. Full Bio. Thomas Brock is a well-rounded financial professional, with over 20 years of experience in investments, corporate finance, and accounting. Article Reviewed on September 02, Article Table of Contents Skip to section Expand. Importance of FDI. As stated in the report, for example , in addition to assessing the legal and regulatory framework, it is well established that investors value the economic size of the host country, its domestic market and proximity to important foreign markets, the potential for innovation, and the level and quality of government services; and an educated and skilled workforce.

The Country profiles of the report need to be read with that context in mind. The challenge for China now is to attract the right kind of FDI as it strives to rebalance its economy, improve the environment, and move up the value chain. As a result, recent FDI strategies have taken a more selective approach, to attract environmentally sustainable, energy efficient, and technologically advanced industries.

As befits its economic global rank China is providing a level playing field for all firms, domestic or foreign alike. You have clicked on a link to a page that is not part of the beta version of the new worldbank. Will you take two minutes to complete a brief survey that will help us to improve our website? Thank you for agreeing to provide feedback on the new version of worldbank. Thank you for participating in this survey! Your feedback is very helpful to us as we work to improve the site functionality on worldbank.

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