Fdi’s Efforts on China’s Trade Structure Optimization and Corresponding Suggestions

FDI’s Efforts on China’s Trade Structure Optimization and Corresponding Suggestions

Hande School         International Trade and Economy

Feng Huichao                        201411033019

China has been very successful in attracting foreign direct investment since it opened its door in the late 1970s. Foreign direct investment(FDI) into the Chinese mainland steady growth in 2015 despite the economic slowdown in the world’s second-largest economy. FDI, which excludes investment in the financial sector, rose 6.4 percent year on year to $126.27 billion in 2015. Massive FDI inflows made up the shortage of funds in China, it produces technology spillover effects, further optimizing the trade structure in China. However, there are also potential problems which will be discussed and then there are some corresponding policy suggestions.

1. Review of export structure optimization theories

1.1 Kiyoshi Kojima’s theory

Professor Kiyoshi Kojima, emeritus professor of Hitotsubashi University in Tokyo, is unarguably a major Japanese international economist. He put forward competitive theory in terms of international specialization. He divided Foreign Direct Investment into “pro-trade FDI” and “anti-trade FDI”. The first type refers to that investor uses FDI to move out that country’s competitively less advanced industry, expands the comparative cost differences in order to maximum international trade. The other kind of FDI means investor make investment into the host country to develop host country’s comparatively advanced industry. Professor Kojima believed that Japan succeeded in foreign investment mainly because MNCs transferred the Japanese disadvantaged industry abroad and concentrated in developing Japan’s comparatively advanced industry domestically. In this way, the industry structure of Japan was rationalized which promoted international trade. Therefore, he characterized Japan’s type of FDI as pro-trade FDI. The main role of Foreign Direct Investment is to transplant superior production technology through training of labor, management and marketing, from the advanced industrial country to lesser developed countries, or, in brief, it is the transfer of superior production functions which replace inferior ones in the host country. FDI is to be a starter and a tutor of industrialization in less developed countries…(Kojima, 1975:6-7)

1.2 Product life-cycle theory

The product life-cycle theory was developed by American economist Raymond Vernon in 1966. He described the change of comparative advantage between different countries from the view of technological innovation. Vernon thought that products were similar to person’s life which also needed to experience four stages: introduction, growth, maturity and decline. Domestic products go through research and development, scale production and market saturation these courses. Leading countries with advanced industry level can cooperate with less developing countries’ low cost resources like labor resources. In this way, it can accelerate the development of industry in backward countries and strengthen the comparative advantage of this product, finally the products come back to the host country with a lower price. Form this process of the continuous transformation of the comparative advantage between the advanced and backward countries, the export trade structure has been optimized.

1.3 Flying-geese theory

Flying-geese theory was developed by Japanese economist Kaname Akamatsu. In this theory, one industry will experience a upward and downward trend of development with the industrial transfer in different countries and different industries’ decline in one country. From this theory, in a less developed but open economy, one industry can be developed by absorbing foreign capital and technology. Furthermore, this process has three stages, the first stage is importing foreign products; the secondary, the production with foreign advanced technology and domestic cheaper labor resources; the last one is exporting domestic products. The theory emphasized the role of FDI in backward countries at industrial formation and development, changes of products’ comparative advantage and subsequently trade structure changes from two aspects of industrial advanced countries and catch-up countries.

In conclusion, as the development of technology and capital accumulation, one country’s trade structure is not immutable. Trade structures can be optimized by changes of comparative advantage structures. And the optimization of the trade structure can be optimized through the FDI capital formation effect and technology spillover effect. A country develops from the original labor relatively abundant into capital abundant one. However, this process needs to rely on the development of the domestic economy, the speed of domestic savings and capital accumulation as well as foreign capital inflows. What is more, FDI has effects on capital accumulation and technology spillover which influence the trade structure changes of host countries.

2. China’s FDI utilization problems

2.1 Core technology is not high

Through the introduction of foreign direct investment, the products still remain at a low level, majority of them are labor-intensive products, which are belonged to low technology products. China has taken a great role in global value chain, but mainly took part in low value added production. The technology imported are mostly secondary-tier technology and although some foreign enterprises offer high technology, they haven’t showed or brought the extremely new and essential technology to China. When foreign capital entered Chinese market, they don’t come with their international advanced comparative technology, by contrast, they only transfer some relatively less comparative industries to China, which finally China loses some proportion of market without any imports of advanced technology. In this case, it is more difficult for China to promote and optimize its trade structure.

2.2 Irrationality in the investment industrial structure

As a whole, Foreign Direct Investment structure in China has problems like the technology level is low, the scale is small, too concentrated geographically, etc. These problems make it more difficult to adjust China’s trade structure. Among foreign investment, the first industry took a small part, investment was concentrated on the general processing industry in the secondary industry. Furthermore, foreign investment was little in basic industrial projects and comprehensive technology services. All of these would make China more difficult to optimize the trade structure. In terms of the third industry, the capital occupied in real estate would get economic growth under higher pressure.