Main issues on foreign investment in China’s regional development: prospects and policy challenges

18:37 01 January in ARTICLES, In English, PUBLICATIONS

logooecd_enOECD | 2002

Markus Taube, Professor, University of Duisburg, Germany,
and Mehmet Ögütçü, Principal Administrator, OECD


This paper forms part of an OECD publication entitled “Foreign Direct Investment in China”: Challenges and Prospects for Regional Development” (OECD, 2002). The views expressed in this report do not necessarily reflect those of the OECD or of the governments of its member countries.


Globalisation is increasingly testing the ability of regional economies to adapt and maintain their competitive edge. Performance gaps are widening between regions, and rapid technological change, extended markets and a greater demand for knowledge are offering new opportunities for regional development. Yet this calls for further investment from enterprises, re-organisation of labor and production, upgrading skills and improvements in the local environment. Some regions with poor links to the sources of prosperity, afflicted by environmental problems, migration, and lagging behind in infrastructure and private investment, are finding it difficult to keep up with the general trends.

China is a country, where regional development is of a foremost priority. The population is dispersed, although unevenly, over a huge landmass, with rural regions being inhabited by more than 900 million people, some two-thirds of the population. Since the launch of the economic reforms in 1978, China’s dominant development policies have gradually shifted from ones based on self-reliance to ones favoring comparative advantage and open door policy. A large amount of existing foreign direct investment (FDI) has been located in China’s relatively prosperous coastal regions, without any significant catching up by the interior central and western regions. While the eastern coastal region accounted for 88% of the country’s total FDI during 1978 to 1999, the central region attracted 9% and the western region only a minor fraction of the total $308 billion in FDI inflows.1

Chinese authorities are keen on redressing the growing imbalance in regional distribution of FDI. Foreign investors, however, maintain that conditions are quite difficult in the western region. The provinces that lie inland from China’s coast cover an area almost twice as big as India (56% of the country’s land area) and hold 23% of its population. Their per capita gross domestic product is only2 60% of the national average. But seen as a labor-intensive manufacturing base, the region is plagued by poor transport and infrastructure that outweigh its lower cost structures. The central/western regions may therefore not be able to copy the export-oriented development strategy of the coastal provinces; therefore, a different development strategy would be defined and a different “type” of FDI to be attracted to the hinterland.

In an effort to close this economic gap, the Chinese government launched “the Western Development Strategy” (Xibu Da Kaifa) in January 2000.2 “The Western Development Strategy” constitutes a cornerstone of the Tenth five-year plan (2001-2005), and is an ambitious top-down effort to steer state investment, outside expertise, foreign loans and private capital into the parts of China most in need but least likely to attract aid on their own. The area covered by this strategy includes six provinces (Gansu, Guizhou, Qinghai, Shaanxi, Sichuan, and Yunnan), five autonomous regions (Guangxi, Inner Mongolia, Ningxia, Tibet, and Xinjiang), and one province-level municipality (Chongqing).3

This highly ambitious programme, however, is not undisputed. Some critics point out that increased government spending in the west will reduce the amount of money available for current social programs, health, education and welfare, thereby aggravating the problems at another hot spot of China’s contemporary development process. In the perception of some foreign enterprises, the programme is not tackling all the main issues at stake for foreign investments in the region. In addition, they recognize that the benefits of westward development could take generations to materialize.

This paper looks at the nexus between FDI and regional development in China. Starting point is an account of the diverging economic development in China’s regions and the geographical patterns of FDI-inflows to China. It is followed by some theoretical reflections on the determinants of location choice for FDI and the parameters of inter-regional competition for FDI inflows. The paper will then turn to the concrete experiences of FDI attraction in two regions located in the Chinese coastal belt and the ensuing growth impulses that FDI exerted on their economic development. These two case studies are then employed, as benchmarks against which the potential of FDI-driven growth processes in the Chinese hinterland will be discussed. It also examines the question of how far central and local government might make a contribution to kick-off and promote such a process. The final section will examine the impact of China’s accession to the World Trade organisation (WTO) and its possible consequences for FDI and China’s regional development.

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