Foreign Direct Investment and Unequal Regional Economic Growth in China



1. INTRODUCTION

China took an “economic reform and open-door” policy in 1978. In July 1979, at the
first step, China created four special economic zones (SEZ) at Shenzhen, Zhuhai, and
Shantou in the Guangdong province and at Xiamen in the Fujian province. Later in
1988, China separated Hainan from the Guangdong province and set up Hainan as the
fifth special economic zone in China. The central government has further built up
fourteen economic and technological development zones within the eleven provinces
along the coastal area in 1984. Since then the Chinese economy has steadily grown
and has experienced even faster growth rate during 1992-1996 partly as a result of
direct foreign investments. However, the investments have been unequally distributed
on the 30 Chinese regions (i.e. provinces in China).

The purpose of this article is to show the impact of the direct foreign investment on
the regional economic growth rate and to discuss why unequal distributed investments
will not necessarily lead to higher regional inequalities. This is done in a short run
Keynesian model. The model is constructed with its variable coefficients inspired by
the expansion method as stated by Casetti (1986).

The Chinese statistics use the expression “direct foreign investment, DFI”. Therefore
this expression is used here.

2. DIRECT FOREIGN INVESTMENT AND REGIONAL GROWTH

The thirty Chinese provinces are grouped into three economic belts according to
openness and location: Coastal area, Central area, and Western area. The region of
Tibet is omitted due to lack of data, therefore 29 regions are included in the data set
for the time period 1988-1996. The average real growth rate in national income (1985-
1991) and GDP (1992-1996) is shown in table 1 in the appendix l. From the table it is
seen that the coastal area grew faster than the national average growth rate, while the
average growth rates of both the central and western areas were below the national
average.

The high growth rate in the coastal area was led by the large scale of direct foreign
investment (DFI) followed by an export expansion. The average shares of DFI in the
regions and export from each region during the period of 1988-1996, compared with
their shares of population is shown in table 2 in the appendix 1. The coastal area
accounted for 90% of DFI and 84% of export, while their population only accounted
for 41%. The table shows quite low shares of DFI and export in both central and
western areas. In recent years the direct foreign investment, specially the joint
ventures, and external demand through export did play an important role in the
Chinese regional development.

The large shares of DFI in the coastal area was partly stimulated by the central
government’s regional policy. The economic development zones and their special
foreign investment policies have attracted quite many foreign-Chinese joint ventures
and foreign sole-ownership companies, and brought large inflows of foreign capital to
the coastal regions. The aim of economic and technological development zones was
to set up new advanced technology industries, to develop export products and new
materials and key parts of machinery needed for import substitution, and to increase
the export earnings.



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