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Policy Proposals for FDI Host Countries with Reference to China’s Economic Evolution Essays

Policy Proposals for FDI Host Countries with Reference to China’s Economic Evolution

General Perspective on FDI

From a macroeconomic perspective, foreign direct investment or FDI is viewed as among the biggest factors contributing to the national income and economic stability of a host country.  Being a longer-term type of capital, FDIs are seen as a “desirable” form of capital as against stocks which are the volatile forms of investments and are very unstable due to its nature (Wong and Adams, 2002).  FDI thus pertains to long-term direct inflow of capital comprised of various investments from foreign companies or investors.  Such investments may be in the form of long-term economic activities buttressed by developments on infrastructure (i.e. outsourcing of jobs to other countries, call-centers and its buildings, etc.) to support such activities.  Being a factor of national income, it contributes directly to economic growth through increasing a country’s reserves and in turn strengthening the investment climate of the host country.

On the other hand, from a microeconomic perspective, FDI can be defined as the “purchase of physical assets” in another country or the significant ownership of a company in another country through buying its stocks (Hunter, 2005).  From this perspective, one can deduce that FDIs have two natures, the long-term and the short-term (portfolio investments).  While the short-term only deals with the high potential for profits which can be determined through economic stability, the long-term FDIs require more stability in the economy of the country and other specific factors such as low cost but skilled or educated workforce, long-term market potential as against domestic investing, large domestic market, easy-access to resources, favorable corporate and investment laws, geographical advantage and political stability or stable bureaucracy.  These perspectives provide a neon fact rationale behind FDI’s – that it is the mechanism of companies in the first world countries to maximise its profits by investing elsewhere and through exploiting the resources of host countries.

On another level, Wong and Adams (2002) highlights that the main reason for FDIs is for firms to “exercise control over a firm” although they contradicted the same definition by explicitly stating the logic that a mere foreign shareholder cannot have full autonomy over the voting shares of another foreign company. According to them, because of a ten percent threshold imposition which limits the ownership of capital or stocks by foreign direct investors in a host company, FDIs can not totally control a firm.  Thus, FDIs are mainly for the reason of outsourcing tasks which, if done in the home country, would be more expensive.

The effects of FDIs can be weighed on a two-dimensional level.  Among the positive effects as enumerated by Hunter (2005) are the decrease of unemployment levels due to the creation of jobs, the increase of investment due to creation of infrastructure or increase in capital investments, the positive effects on the balance of payments, increase in the number of domestic suppliers, development of new technology, transfer of knowledge or the ‘know-how’ and regional/sectoral developments. The negatives include the dominance of the industrial sector, the technological dependence on foreign technology sources, various changes on domestic economic plans to give way to the FDI-focused activities and an unquantifiable cultural change due to foreign business practices and infusion of foreign culture.

Having discussed the basic points on foreign direct investments, among the resonating issues currently is the trend that Western countries are now outsourcing their capital investments to various host countries (Tandon, 2004).  This is primarily due to the increasing crises on profitability, blaming it to the increase in capital and labour costs especially in Western countries.  Thus, rather than importing these factors (i.e. raw materials, etc.) from other countries which would be more costly to do so, Western countries have decided to bring out their capital to other countries where labor costs are cheaper, unions are weaker and creating capital investments would not be as expensive as producing the goods locally. The most popular host country right now is China, having the biggest labor and capital resource in the world.  The declaration its open-door policy twenty years ago (OECD, 2000) gave international companies the access to its cheap labor and the vast source of its untapped capital (raw materials).  The open-door policy paved China’s dominance in the world by allowing foreign companies exploit its capital resources in the form of FDIs..

Tandon (2004) of SEATINI briefly explains how this market phenomenon occurred.  Using the example of an automobile company’s operation, the benefits of international trade through FDI was illustrated.  According to Tandon (2004), given an automobile company in Germany where labor cost is high, the raw materials to produce one unit of car are expensive and the demand for automobiles are not high, the company would therefore operate beyond its means in the long-run and would have to close down.  In order to evade the latter scenario, it will have to relocate elsewhere where it can minimize its costs and maximize its profits.  If it transfers its investments to China where the cumulative costs of operating machineries, investing on capital infrastructure and paying for manpower would just be a fraction of the entire cost if it were to operate in Germany, the company would enjoy the most of its profits.  Thus, being among the world’s supplier of cheap manpower and raw materials, China has become the mecca of FDIs.

China’s Case
The rise of China’s economy in the world market proves to be colossal and indomitable given the unshakeable stability of China’s growth despite market shocks (Song[1], 2005) (see Table 2). OECD (2000) narrates that the number of FDIs in China has yielded to both external and internal changes in China’s economic structure.  It certainly has strengthened China in all facets.  OECD (2000, p.5) and Wong and Adams[2] (2002, p.8) reported that China is by far the largest FDI-host country among developing countries and it is the second largest recipient country in the world, next to the United States.  However, recent studies report that China has already overtaken the United States in terms of foreign direct investment flows in 2003 (Chinadaily.com, 2004).

Its long history in FDI can be traced as far as 1979.  OECD (2005) further divided the FDI history of China into three parts: 1979-1983 (first phase), 1984-1991 (second phase) and 1992-1999 (third phase).  The table below shows the FDI inflows behavior of China for the three phases.

Source: (OECD, 2000, p. 6)

During the first phase, massive infrastructure development was done through creation of Special Economic Zones (SEZs) and provision of fiscal incentives to business locators in said ecozones.  The effects of these endeavours however were not felt instantly.  Only after several provinces opened their coastal cities for the world to exploit its resources during the second phase did the impact of FDIs were noticed.  The FDI inflow was recorded to hit $ 21.5 USD in 1984-1991 as against the FDI inflow during the first phase meagerly amounting to $ 1.8 million USD, almost 12 times higher than the latter.  When Deng Xiaoping circumnavigated the southern areas of China in 1992 to strictly implement the open-door policy of China and the market-oriented economic reform, a dramatic change in China’s FDI was felt.  FDI inflows during the third phase were recorded to jump to a whopping $282.65 million USD, thirteen times as much as the second phase and almost 157 times as much as the first phase.  Truly, China’s growth basing it merely on its FDI inflows has been indeed remarkable.

FDI as a factor of capital inflow was also seen to have surpassed the other factors over the years.  Capital inflow is comprised of foreign direct investments, loans (external) and foreign investment.  OECD (2000) reported that capital loans are the main capital inflow factor in 1980s China, comprising 60 percent of the entire capital inflow.  However, with the advent of the second phase of FDIs to the third phase, capital loans were outshone by China’s foreign direct investment inflows (OECD, 2000).   By 2004, Song (2005) reports that China’s FDI inflow is at $60.63 Billion USD.  Tabulating the narration of Dr. Song (2005) on China’s FDI inflows as against the world’s total FDI inflows, one can arrive with Table 2 below.

Table 2. World FDI Inflows vs. China’s FDI Inflows
Year
World FDI Inflow
(Billion U$D)
Growth Rate
(World FDI Inflow) %
China’s FDI Inflow
(Billion U$D)
Growth Rate
(China’s FDI Inflow) %
2000
1,388

40.7

2001
817.6
(41.1)
46.8
14.99
2002
678.6
(17.0)
52.7
12.61
2003
559.6
(17.5)
53.5
1.52

Analysing Table 2, one can deduce that while the entire FDI inflows in the world decreases, China’s FDI inflows increases and continuously appreciates in an unprecedented positive growth rate.  Dr. Song (2005) reported that from 1979 to 2000, China’s growth rate was “at 9.5 percent – the highest in the world ever”.  He further explains that this can be attributed to China’s geographical advantage as being at the heart of Asia, its culture being the main origin of diverse cultures (i.e. Korea, Japan, Taiwan, Thailand, etc.), its involvement in the World Trade Organization, its intercontinental economic background and most importantly, its policy reforms.

Sectoral Distribution of China’s FDI

OECD (2000) revealed that the manufacturing sector of China dominates its FDI inflows.  In 1998, it was reflected to cover 60 percent of China’s entire FDI inflows. The real estate sector covers the second biggest chunk of FDI at 24.4 percent.  Next is wholesale and retailing only at 6 percent.  Followed by agriculture, fishery forestry and fishing at 1.8 percent.

By 2003, the United Nations Conference on Trade and Development (UNCTAD) reported through Chinadaily.com (2004) that China’s manufacturing industry bagged US$53.5 billion of the entire FDI in 2003 compared with US$ 52.7 billion in 2002.
Having discussed the nature of FDIs and its impact to an idle economy like the status of China before, which used to be only 27th in the world economy in 1979 now the 3rd in the world (Song, 2005), the challenge now for other host country governments is how to create and implement policies on foreign direct investors in order to foster economic growth.

Adopting the Policies Implemented by China
Development of Economic Zones or Industrial Parks. Although it is a risky move for many host country governments, developing areas to become as economic zones and/or industrial parks which also provide various tax incentives to investors can be a good move in fostering economic growth.  There are many considerations however in taking this maneuver.  First is the amount of taxes that the host government has to forego in grim hope of expecting greater revenue flows in the near future such in the case of China.  Second is the type of capital that needs to be formed to ensure the longevity of foreign direct investments.  Third is the type of fiscal incentives to provide to various investors, whether it is a tax holiday or lower taxes or no-taxes scheme.  Lastly, the volatility of the economy considering other factors such as political stability and market fluctuations must also be given highest regard since it has the biggest effect on the prices of capital costs.
For the first argument on losing revenues, governments must study well the amount of revenues that it is willing to shell off for the development of economic zones.  Among the most costly investments is infrastructure.  Thus, host governments must make sure that the types of infrastructures to be built are those which investors prefer and would prefer over other options. With regard to the amount of future revenues host governments are willing to sacrifice, host governments must study well the feasibility of such move in attracting investors considering the amount of future capital flows that these investors would contribute to the economy on the long-run. The latter must supersede the former.

In relation to the first argument, infrastructures that are to be built must conform to the needs of the investors.  These infrastructures include accessible roads and shipping ports or tarmacs and other immovable facilities needed by FDIs to operate at their advantage.  Infrastructures should also include telephone lines, source of water and electricity among all else.
Provide More Favorable Fiscal Incentives on Investors Investing on Labour-Intensive Markets.  Before China attained the economic status of being the imperial giant in the world economy, it underwent massive labour deregulation.  It almost killed the price of its labour compared to the prevailing wages in other developing countries in order to attract investors to invest into China.  Given the abundant source of labour because of China’s ever-growing population, investors then can exploit it to their optimal advantage. Although FDIs itself provide jobs in the host country, it is different when the competition to attract FDIs to invest into the country is price-based.  Although it proves to be an effective strategy for China, it might not work in other nations given the fact that China has already pioneered this strategy and that firms are already magnetised to invest in China instead of taking larger risks in other countries yet to take such endeavour.  Thus, the writer proposes that the best way to solve the dilemma on attracting investors and solving malignant high unemployment levels (OECD, 2000; TUAC, 2006) in host countries is to give favorable or more competitive fiscal incentives to investors especially to those who would focus more on labour-intensive markets such as the manufacturing sector.  If host countries provide incentives such as this, it would in turn create thousands of jobs for the unemployed.  In the long run, such maneuver would be beneficial to the entire economy such that there is a larger possibility to decrease poverty level, increase in technology advancements through transfer of know-how and decrease in unemployment rate. All of which are factors which leads to economic growth.
Other Policies Proposed to Host Countries
Simplified procedures.  In relation to providing fiscal incentives to investors, creating an investor-friendly climate in the form of simplified procedures in terms of government assistance in catalyzing processes (i.e. submitting audited financial reports, requesting for specific information, etc.) would not only be favorable for investors but would be advantageous in hastening the production processes.  These not only have a positive implication of securing their stay in the country, but also in generating more products in a day than following complex procedures leading to the same.

Provide investor-friendly regime.  This aspect leans more on over-all administrative policies pertinent to the country’s bureaucracy.  Because political stability is among the many considerations of entrepreneurs in investing, host governments must aim to show that they are capable of administering long-term investments.  Governments should campaign not only for capital investments but also on security of foreign nationals who would be relocating in the economic zones for the operation of their companies.  Moreover, clear investment policies should be provided by the country to remove confusion from the part of the investors (Ministry of Trade and Industry, 2002).

One-stop shop.  In the case of the ASEAN4 countries (Thailand, Philippines, Malaysia and Indonesia), the export-led growth was due to the concentration of FDIs in the manufacturing industry which aim is to assemble the products or add-value to it before being exported to various countries (Thomsen, 1999). This was due to the principle of one-stop shop where FDIs have access to all sources needed for production in industrial parks or economic zones.  According to Thomsen (1999), foreign investors have to purchase their inputs from abroad to successfully produce their commodities.  But if these inputs are available in the host-country, the investors would not have to import it from other countries and instead stimulate the economy of the host-country by purchasing the inputs from the local market.  Moreover, if the FDI is oriented towards the domestic market such as the case of China, it would be favorable for the investor to do the production and manufacturing of goods in the host-country itself to minimise costs of production and distribution.
Conclusion
The phenomenal economic growth of China did not just happen overnight.  Although China all on its own can compete in the world market, much of its reserves are due to the foreign direct investments in its economy.  Truly, FDIs contribute to economic growth.  To further stimulate growth through FDIs, host countries are advised to create the market environment in the country favorable to the investors such as resources can be used by FDIs at its advantage.  Creation of economic zones or industrial parks which provide fiscal incentives help attract investors to locate in the country, thereby stimulating FDIs.  Host countries are also advised to provide an investor-friendly regime where investors would see a stable bureaucracy and stable market prices and thereby decide that the economy is worth investing on.  Making sources, such as raw materials and other materials which can be utilised for the production of commodities available at much cheaper cost as compared to producing it in the home country, is also among the strategies which countries may adopt to stimulate FDIs.  The policies aforementioned are among the proposals that the researcher find palpable in the present-day world economy.

References
Chinadaily.com. 2004.  China overtakes US as top FDI inflow country. http://www.chinadaily.com.cn/english/doc/2004-09/23/content_377213.htm
Hunter, R. J. Jr. 2005. An Introduction and Primer on Foreign Direct Investment in UNITAR/SHU Series on International Economics and Finance Foreign Direct Investment for Development Financing, Organized jointly by UNITAR and the Stillman School of Business at Seton Hall University (SHU) 16 – 19 May, Hiroshima, Japan.  Retrieved July 23, 2007 from http://www.unitar.org/hiroshima/programmes/ief05/speakers_presentations/Hunter%20Primer….pdf

Ministry of Trade and Industry. 2002. Foreign direct investment policy.  Retrieved July 22, 2007 from http://www.mti.gov.bt/industry/Final%20approved%20FDI%20Policy-.doc

Song, S. 2005. China’s Role in the World Economy in Executive Intelligence Review, 22 July. Retrieved July 23, 2007 from http://www.larouchepub.com/other/2005/site_packages/june28-29_berlin/3229dr_song_hong.html

Organisation of Economic Cooperation and Development (OECD). 2000. Main determinants and impacts of foreign direct investment on China’s economy, Number 2000/4. Retrieved July 23, 2007 from http://www.oecd.org/dataoecd/57/23/1922648.pdf

Tandon, Y. 2004. What is foreign direct investment (fdi)? In SEATINI, September.  Retrieved July 22, 2007 from http://www.seatini.org/publications/factsheets/fdishort.htm

Thomsen, S. 1999. Southeast Asia: the role of foreign direct investment policies in development. In OECD, Working Papers on International Investment. Retrieved July 23, 2007 from http://www.mti.gov.bt/industry/Final%20approved%20FDI%20Policy-.doc

Trade Union Advisory Committee (TUAC). 2006.  Productive Employment – A Factor of Economic Growth and Social Cohesion.  Trade Union Discussion Paper G8 Labour and Employment Ministers’ Conference.  Moscow, 9-10 October.  Retrieved July 24, 2007 from http://www.oecd.org/dataoecd/32/38/37868044.pdf.

Wong, Y.C. and Adams, C.  2002. Trends in global and regional foreign direct investment flows conference on foreign direct investment: opportunities and challenges for Cambodia, Laos and Vietnam, jointly organized by the International Monetary Fund and the State Bank of Vietnam, Hanoi, Vietnam, August 16-17.

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Policy Proposals for FDI Host Countries with Reference to
China’s Economic Evolution

General Perspective on FDI

From a macroeconomic perspective, foreign direct investment or FDI is viewed as among the biggest factors contributing to the national income and economic stability of a host country.  Being a longer-term type of capital, FDIs are seen as a “desirable” form of capital as against stocks which are the volatile forms of investments and are very unstable due to its nature (Wong and Adams, 2002).  FDI thus pertains to long-term direct inflow of capital comprised of various investments from foreign companies or investors.  Such investments may be in the form of long-term economic activities buttressed by developments on infrastructure (i.e. outsourcing of jobs to other countries, call-centers and its buildings, etc.) to support such activities.  Being a factor of national income, it contributes directly to economic growth through increasing a country’s reserves and in turn strengthening the investment climate of the host country.

On the other hand, from a microeconomic perspective, FDI can be defined as the “purchase of physical assets” in another country or the significant ownership of a company in another country through buying its stocks (Hunter, 2005).  From this perspective, one can deduce that FDIs have two natures, the long-term and the short-term (portfolio investments).  While the short-term only deals with the high potential for profits which can be determined through economic stability, the long-term FDIs require more stability in the economy of the country and other specific factors such as low cost but skilled or educated workforce, long-term market potential as against domestic investing, large domestic market, easy-access to resources, favorable corporate and investment laws, geographical advantage and political stability or stable bureaucracy.  These perspectives provide a neon fact rationale behind FDI’s – that it is the mechanism of companies in the first world countries to maximise its profits by investing elsewhere and through exploiting the resources of host countries.

On another level, Wong and Adams (2002) highlights that the main reason for FDIs is for firms to “exercise control over a firm” although they contradicted the same definition by explicitly stating the logic that a mere foreign shareholder cannot have full autonomy over the voting shares of another foreign company. According to them, because of a ten percent threshold imposition which limits the ownership of capital or stocks by foreign direct investors in a host company, FDIs can not totally control a firm.  Thus, FDIs are mainly for the reason of outsourcing tasks which, if done in the home country, would be more expensive.

The effects of FDIs can be weighed on a two-dimensional level.  Among the positive effects as enumerated by Hunter (2005) are the decrease of unemployment levels due to the creation of jobs, the increase of investment due to creation of infrastructure or increase in capital investments, the positive effects on the balance of payments, increase in the number of domestic suppliers, development of new technology, transfer of knowledge or the ‘know-how’ and regional/sectoral developments. The negatives include the dominance of the industrial sector, the technological dependence on foreign technology sources, various changes on domestic economic plans to give way to the FDI-focused activities and an unquantifiable cultural change due to foreign business practices and infusion of foreign culture.

Having discussed the basic points on foreign direct investments, among the resonating issues currently is the trend that Western countries are now outsourcing their capital investments to various host countries (Tandon, 2004).  This is primarily due to the increasing crises on profitability, blaming it to the increase in capital and labour costs especially in Western countries.  Thus, rather than importing these factors (i.e. raw materials, etc.) from other countries which would be more costly to do so, Western countries have decided to bring out their capital to other countries where labor costs are cheaper, unions are weaker and creating capital investments would not be as expensive as producing the goods locally. The most popular host country right now is China, having the biggest labor and capital resource in the world.  The declaration its open-door policy twenty years ago (OECD, 2000) gave international companies the access to its cheap labor and the vast source of its untapped capital (raw materials).  The open-door policy paved China’s dominance in the world by allowing foreign companies exploit its capital resources in the form of FDIs..

Tandon (2004) of SEATINI briefly explains how this market phenomenon occurred.  Using the example of an automobile company’s operation, the benefits of international trade through FDI was illustrated.  According to Tandon (2004), given an automobile company in Germany where labor cost is high, the raw materials to produce one unit of car are expensive and the demand for automobiles are not high, the company would therefore operate beyond its means in the long-run and would have to close down.  In order to evade the latter scenario, it will have to relocate elsewhere where it can minimize its costs and maximize its profits.  If it transfers its investments to China where the cumulative costs of operating machineries, investing on capital infrastructure and paying for manpower would just be a fraction of the entire cost if it were to operate in Germany, the company would enjoy the most of its profits.  Thus, being among the world’s supplier of cheap manpower and raw materials, China has become the mecca of FDIs.

China’s Case
The rise of China’s economy in the world market proves to be colossal and indomitable given the unshakeable stability of China’s growth despite market shocks (Song_, 2005) (see Table 2). OECD (2000) narrates that the number of FDIs in China has yielded to both external and internal changes in China’s economic structure.  It certainly has strengthened China in all facets.  OECD (2000, p.5) and Wong and Adams_ (2002, p.8) reported that China is by far the largest FDI-host country among developing countries and it is the second largest recipient country in the world, next to the United States.  However, recent studies report that China has already overtaken the United States in terms of foreign direct investment flows in 2003 (Chinadaily.com, 2004).

Its long history in FDI can be traced as far as 1979.  OECD (2005) further divided the FDI history of China into three parts: 1979-1983 (first phase), 1984-1991 (second phase) and 1992-1999 (third phase).  The table below shows the FDI inflows behavior of China for the three phases.

_
Source: (OECD, 2000, p. 6)

During the first phase, massive infrastructure development was done through creation of Special Economic Zones (SEZs) and provision of fiscal incentives to business locators in said ecozones.  The effects of these endeavours however were not felt instantly.  Only after several provinces opened their coastal cities for the world to exploit its resources during the second phase did the impact of FDIs were noticed.  The FDI inflow was recorded to hit $ 21.5 USD in 1984-1991 as against the FDI inflow during the first phase meagerly amounting to $ 1.8 million USD, almost 12 times higher than the latter.  When Deng Xiaoping circumnavigated the southern areas of China in 1992 to strictly implement the open-door policy of China and the market-oriented economic reform, a dramatic change in China’s FDI was felt.  FDI inflows during the third phase were recorded to jump to a whopping $282.65 million USD, thirteen times as much as the second phase and almost 157 times as much as the first phase.  Truly, China’s growth basing it merely on its FDI inflows has been indeed remarkable.

FDI as a factor of capital inflow was also seen to have surpassed the other factors over the years.  Capital inflow is comprised of foreign direct investments, loans (external) and foreign investment.  OECD (2000) reported that capital loans are the main capital inflow factor in 1980s China, comprising 60 percent of the entire capital inflow.  However, with the advent of the second phase of FDIs to the third phase, capital loans were outshone by China’s foreign direct investment inflows (OECD, 2000).   By 2004, Song (2005) reports that China’s FDI inflow is at $60.63 Billion USD.  Tabulating the narration of Dr. Song (2005) on China’s FDI inflows as against the world’s total FDI inflows, one can arrive with Table 2 below.

Table 2. World FDI Inflows vs. China’s FDI Inflows
Year_
World FDI Inflow
(Billion U$D)_
Growth Rate
(World FDI Inflow) %_
China’s FDI Inflow
(Billion U$D)_
Growth Rate
(China’s FDI Inflow) %_
_
2000_
1,388_
_
40.7_
_
_
2001_
817.6_
(41.1)_
46.8_
14.99_
_
2002_
678.6_
(17.0)_
52.7_
12.61_
_
2003_
559.6_
(17.5)_
53.5_
1.52_
_

Analysing Table 2, one can deduce that while the entire FDI inflows in the world decreases, China’s FDI inflows increases and continuously appreciates in an unprecedented positive growth rate.  Dr. Song (2005) reported that from 1979 to 2000, China’s growth rate was “at 9.5 percent – the highest in the world ever”.  He further explains that this can be attributed to China’s geographical advantage as being at the heart of Asia, its culture being the main origin of diverse cultures (i.e. Korea, Japan, Taiwan, Thailand, etc.), its involvement in the World Trade Organization, its intercontinental economic background and most importantly, its policy reforms.

Sectoral Distribution of China’s FDI

OECD (2000) revealed that the manufacturing sector of China dominates its FDI inflows.  In 1998, it was reflected to cover 60 percent of China’s entire FDI inflows. The real estate sector covers the second biggest chunk of FDI at 24.4 percent.  Next is wholesale and retailing only at 6 percent.  Followed by agriculture, fishery forestry and fishing at 1.8 percent.

By 2003, the United Nations Conference on Trade and Development (UNCTAD) reported through Chinadaily.com (2004) that China’s manufacturing industry bagged US$53.5 billion of the entire FDI in 2003 compared with US$ 52.7 billion in 2002.
Having discussed the nature of FDIs and its impact to an idle economy like the status of China before, which used to be only 27th in the world economy in 1979 now the 3rd in the world (Song, 2005), the challenge now for other host country governments is how to create and implement policies on foreign direct investors in order to foster economic growth.

Adopting the Policies Implemented by China
Development of Economic Zones or Industrial Parks. Although it is a risky move for many host country governments, developing areas to become as economic zones and/or industrial parks which also provide various tax incentives to investors can be a good move in fostering economic growth.  There are many considerations however in taking this maneuver.  First is the amount of taxes that the host government has to forego in grim hope of expecting greater revenue flows in the near future such in the case of China.  Second is the type of capital that needs to be formed to ensure the longevity of foreign direct investments.  Third is the type of fiscal incentives to provide to various investors, whether it is a tax holiday or lower taxes or no-taxes scheme.  Lastly, the volatility of the economy considering other factors such as political stability and market fluctuations must also be given highest regard since it has the biggest effect on the prices of capital costs.
For the first argument on losing revenues, governments must study well the amount of revenues that it is willing to shell off for the development of economic zones.  Among the most costly investments is infrastructure.  Thus, host governments must make sure that the types of infrastructures to be built are those which investors prefer and would prefer over other options. With regard to the amount of future revenues host governments are willing to sacrifice, host governments must study well the feasibility of such move in attracting investors considering the amount of future capital flows that these investors would contribute to the economy on the long-run. The latter must supersede the former.

In relation to the first argument, infrastructures that are to be built must conform to the needs of the investors.  These infrastructures include accessible roads and shipping ports or tarmacs and other immovable facilities needed by FDIs to operate at their advantage.  Infrastructures should also include telephone lines, source of water and electricity among all else.
Provide More Favorable Fiscal Incentives on Investors Investing on Labour-Intensive Markets.  Before China attained the economic status of being the imperial giant in the world economy, it underwent massive labour deregulation.  It almost killed the price of its labour compared to the prevailing wages in other developing countries in order to attract investors to invest into China.  Given the abundant source of labour because of China’s ever-growing population, investors then can exploit it to their optimal advantage. Although FDIs itself provide jobs in the host country, it is different when the competition to attract FDIs to invest into the country is price-based.  Although it proves to be an effective strategy for China, it might not work in other nations given the fact that China has already pioneered this strategy and that firms are already magnetised to invest in China instead of taking larger risks in other countries yet to take such endeavour.  Thus, the writer proposes that the best way to solve the dilemma on attracting investors and solving malignant high unemployment levels (OECD, 2000; TUAC, 2006) in host countries is to give favorable or more competitive fiscal incentives to investors especially to those who would focus more on labour-intensive markets such as the manufacturing sector.  If host countries provide incentives such as this, it would in turn create thousands of jobs for the unemployed.  In the long run, such maneuver would be beneficial to the entire economy such that there is a larger possibility to decrease poverty level, increase in technology advancements through transfer of know-how and decrease in unemployment rate. All of which are factors which leads to economic growth.
Other Policies Proposed to Host Countries
Simplified procedures.  In relation to providing fiscal incentives to investors, creating an investor-friendly climate in the form of simplified procedures in terms of government assistance in catalyzing processes (i.e. submitting audited financial reports, requesting for specific information, etc.) would not only be favorable for investors but would be advantageous in hastening the production processes.  These not only have a positive implication of securing their stay in the country, but also in generating more products in a day than following complex procedures leading to the same.

Provide investor-friendly regime.  This aspect leans more on over-all administrative policies pertinent to the country’s bureaucracy.  Because political stability is among the many considerations of entrepreneurs in investing, host governments must aim to show that they are capable of administering long-term investments.  Governments should campaign not only for capital investments but also on security of foreign nationals who would be relocating in the economic zones for the operation of their companies.  Moreover, clear investment policies should be provided by the country to remove confusion from the part of the investors (Ministry of Trade and Industry, 2002).

One-stop shop.  In the case of the ASEAN4 countries (Thailand, Philippines, Malaysia and Indonesia), the export-led growth was due to the concentration of FDIs in the manufacturing industry which aim is to assemble the products or add-value to it before being exported to various countries (Thomsen, 1999). This was due to the principle of one-stop shop where FDIs have access to all sources needed for production in industrial parks or economic zones.  According to Thomsen (1999), foreign investors have to purchase their inputs from abroad to successfully produce their commodities.  But if these inputs are available in the host-country, the investors would not have to import it from other countries and instead stimulate the economy of the host-country by purchasing the inputs from the local market.  Moreover, if the FDI is oriented towards the domestic market such as the case of China, it would be favorable for the investor to do the production and manufacturing of goods in the host-country itself to minimise costs of production and distribution.
Conclusion
The phenomenal economic growth of China did not just happen overnight.  Although China all on its own can compete in the world market, much of its reserves are due to the foreign direct investments in its economy.  Truly, FDIs contribute to economic growth.  To further stimulate growth through FDIs, host countries are advised to create the market environment in the country favorable to the investors such as resources can be used by FDIs at its advantage.  Creation of economic zones or industrial parks which provide fiscal incentives help attract investors to locate in the country, thereby stimulating FDIs.  Host countries are also advised to provide an investor-friendly regime where investors would see a stable bureaucracy and stable market prices and thereby decide that the economy is worth investing on.  Making sources, such as raw materials and other materials which can be utilised for the production of commodities available at much cheaper cost as compared to producing it in the home country, is also among the strategies which countries may adopt to stimulate FDIs.  The policies aforementioned are among the proposals that the researcher find palpable in the present-day world economy.

References
Chinadaily.com. 2004.  China overtakes US as top FDI inflow country. http://www.chinadaily.com.cn/english/doc/2004-09/23/content_377213.htm
Hunter, R. J. Jr. 2005. An Introduction and Primer on Foreign Direct Investment in UNITAR/SHU Series on International Economics and Finance Foreign Direct Investment for Development Financing, Organized jointly by UNITAR and the Stillman School of Business at Seton Hall University (SHU) 16 – 19 May, Hiroshima, Japan.  Retrieved July 23, 2007 from http://www.unitar.org/hiroshima/programmes/ief05/speakers_presentations/Hunter%20Primer….pdf

Ministry of Trade and Industry. 2002. Foreign direct investment policy.  Retrieved July 22, 2007 from http://www.mti.gov.bt/industry/Final%20approved%20FDI%20Policy-.doc

Song, S. 2005. China’s Role in the World Economy in Executive Intelligence Review, 22 July. Retrieved July 23, 2007 from http://www.larouchepub.com/other/2005/site_packages/june28-29_berlin/3229dr_song_hong.html

Organisation of Economic Cooperation and Development (OECD). 2000. Main determinants and impacts of foreign direct investment on China’s economy, Number 2000/4. Retrieved July 23, 2007 from http://www.oecd.org/dataoecd/57/23/1922648.pdf

Tandon, Y. 2004. What is foreign direct investment (fdi)? In SEATINI, September.  Retrieved July 22, 2007 from http://www.seatini.org/publications/factsheets/fdishort.htm

Thomsen, S. 1999. Southeast Asia: the role of foreign direct investment policies in development. In OECD, Working Papers on International Investment. Retrieved July 23, 2007 from http://www.mti.gov.bt/industry/Final%20approved%20FDI%20Policy-.doc

Trade Union Advisory Committee (TUAC). 2006.  Productive Employment – A Factor of Economic Growth and Social Cohesion.  Trade Union Discussion Paper G8 Labour and Employment Ministers’ Conference.  Moscow, 9-10 October.  Retrieved July 24, 2007 from http://www.oecd.org/dataoecd/32/38/37868044.pdf.

Wong, Y.C. and Adams, C.  2002. Trends in global and regional foreign direct investment flows conference on foreign direct investment: opportunities and challenges for Cambodia, Laos and Vietnam, jointly organized by the International Monetary Fund and the State Bank of Vietnam, Hanoi, Vietnam, August 16-17.

[1]Dr. Song Hong is a senior research fellow at the Chinese Academy of Social Sciences, Institute of World Economics and Politics.
[2]Yu Ching Wong and Charles Adams prepared the paper “Trends in Global and Regional Foreign Direct Investment Flows” for the Conference on Foreign Direct Investment: Opportunities
and Challenges for Cambodia, Laos and Vietnam, jointly organized by the International
Monetary Fund and the State Bank of Vietnam, Hanoi, Vietnam held last August 16-17, 2002.
 

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