Fdi In China

Fdi In China

FINC 420
International Finance Foreign Direct Investment in China

B-A7-0382-5 B-A7-0411-6 B-A7-0442-3 B-A7-0464-9

John, Wang Nan Danica, Meng Xiaodan Lancy, Liu Jingjing Harry, Huang Jin

1. Background
1.1 Definition of FDI

Foreign direct investment (FDI) reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise. The above relationship is evidenced by a direct or indirect ownership by an investor resident in one economy of at least 10% of the voting power of an enterprise resident in another economy.

1.2 Reasons for Emergence of FDI

In reality, we do not assume that the markets are perfect and the information is flowing freely and at no cost. According to Hymer, local companies tend to be more informed of the domestic economic environment and domestic market than their foreign competitors do. And such market imperfections as imperfections in goods markets, imperfections in factor markets, scale economies and government-imposed disruptions. Therefore, companies that would like to exploit foreign markets engage themselves in FDI. And correspondingly, multinational corporations (MNCs) are established. An MNC is a business firm incorporated in one country that has production and sales operations in several other countries. It may benefit from economies of scale, underpriced labor services and special R&D capabilities.

1.3 Types of FDI

1

In the following, FDI can be categorized into several different types based on two criteria: One is the direction of capital flow, and the other one is the objectives the FDI.

Based on the first criteria, FDIs can be...