Exports, Foreign Direct Investment and Economic Development in China

China’s economic performance is impressive since it reformed and opened up its economy in 1978. This most populous country in the world achieved an average annual real growth rate of around 9.5 per cent over the period 1978–2000. Her growth performance is superior to that of other populous countries such as India and Brazil, other transitional economies such as Poland and Russia, and also that of the fast- growing Southeast Asian ‘Little Dragons’ such as Malaysia and Thailand.

The role of exports in the development process has for long been the subject of debate. These debates have been recently rekindled with the embrace of outward-looking open economy policies by most developing countries, the opening up of China to the world economy, and, more recently, India’s efforts at economic liberalization.

There are a number of empirical studies on the relationship between exports and growth. These studies are conducted at two levels. One is at the macro level using aggregate country-level data (Michaely, 1977; Balassa, 1978, 1985;Krueger, 1978;Feder, 1983;Kavoussi, 1984;Jung and Marshall, 1985;Salvatore and Hatcher, 1991;Greenaway and Sapsford, 1994a, 1994b;Shan and Sun, 1998). Another group includes research at the micro level using firm-level data (Marin, 1992; Henriques and Sadorsky, 1996;Bernard and Jensen, 1997, 1999; Yamada, 1998; Liu, Tsou and Hammitt, 1999;and Aw, Chuang and Roberts, 2000). Despite the enormous amount of literature, the empirical results are controversial and inconclusive. Here we review this literature and identify issues for study in the context of China.

Before 1979, the Chinese economy was a closed economy. With its opening up to the world economy there occurred dramatic changes in its external trade. A number of policies were introduced to promote export growth, and external trade expanded rapidly. Total imports and exports of China increased from $38.14 billion in 1980 to $474 billion in 2000, with an average annual growth rate of 13 per cent. The share of exports in GDP increased from 5 per cent in 1978 to 23 per cent in 2000. In this process, a number of distinctive structural changes took place in terms of product composition, market distribution, trade mode and major trade partners. This chapter reviews the trade policy, trade performance, and the structure and main features of China’s exports since the 1980s. This review will provide the necessary background for further investigation of the impact of exports and FDI on economic development in China in Chapters 5–9.

This chapter analyses the impact of exports on employment growth in China. In an overpopulated, large agricultural economy such as China, there can be two interpretations of the relationship between labour, exports and growth. One is the ‘vent-for-surplus’ thesis, which suggests that the opening up of the economy to international trade provides an outlet for surplus productive capacity of the country, and promotes economic growth. The other is the ‘development with unlimited supplies of labour’ model, which suggests that capital accumulation in the industrial sector cumulatively draws surplus labour from the agricultural sector, and leads to output expansion in the economy. There are subtle differences between the two models and each of them has differing implications for policy. This chapter analyses the two models in the context of China’s exports and draws policy conclusions.

Pronounced disparities in income and economic opportunities between the coastal and inland regions of China are well documented in the literature. Factors responsible for these regional inequalities include preferential government policies, favourable geographical location, and superior infrastructure facilities in the coastal regions. Another factor contributing to the observed increase in regional disparities in China is insufficient linkages from growth engines. This chapter explores the proposition that regional disparities in China are related intimately to the structure of exports and foreign direct investment (FDI), which results in limited linkages emanating from growth engines.

Increasing income inequalities between the coastal and the inland regions in China is a topic that has attracted considerable concern in recent years. Received explanations include preferential government policies in the coastal regions, favourable geographical location and superior infrastructure facilities in the coastal regions. This chapter explores the causes of regional disparity in the light of the celebrated Singer Hypotheses. The analysis of increasing inequalities between the coastal and the inland regions in China can be anchored in Singer’s hypotheses of dualism for several reasons. First, several features of China’s foreign trade and FDI are of the trade-cum-FDI type that Singer (1950, 1975) analyses. Second, the economic relationship between the coastal and the inland regions of China is of the classic centre-periphery type that Singer expounds in the context of developing and developed countries.

Township and village enterprises (TVEs) have played a significant role in the growth of the Chinese economy since the economic reforms of 1978. They accounted for 47 per cent of total industrial output in 2000² and their annual average real growth rate over the 10-year period 1988–99 was as high as 19 per cent.³ This chapter analyses the productive efficiency of TVEs and the sources of their efficiency. Various indicators of productive efficiency for a cross-section of TVEs in the manufacturing sector are estimated and compared with those for state-owned enterprises (SOEs), and for some of TVEs’ major international competitors.

Exports and foreign direct investment (FDI) in China have increased dramatically since the 1980s. This book has investigated the impact of exports and FDI on Chinese economic development since the economic reforms in 1978, with emphasis on transmission mechanisms. In the main, the book argues that exports have primarily served as a ‘vent-for-surplus’ rather than as a driver of productivity growth for China. The gains from exports are significant, but the contribution of exports to long-term growth is not identifiably large. China’s exports and FDI have also been factors in the increasing regional disparities in the country. This is not only because the coastal regions enjoy greater export and FDI-induced growth, but also because of limited linkages generated by the engines of economic growth. The study suggests that trade liberalization can lead to economic development provided that several preconditions are met and that transmission mechanisms are effective. Thus, in order to achieve long-term sustainable growth that promotes both equity and efficiency, complementary policies and reforms will be required to improve transmission mechanisms and limit negative effects. This chapter summarizes the major findings of the study and discusses the policy implications.