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Home > Investments > Emerging Markets

By Natasha Agarwal | Published Jul 02, 2012

FDI’s role in China’s growth

It is hard to set about becoming the world’s largest economy without thinking big. Ever since 1978, when it embarked on the reforms that have elevated it to the status of superpower-elect, China has thought on the very grandest scale.

The results are abundantly clear, yet an enduring concern of late has been the question of how the Dragon can sustain its astonishing growth. This topic has occupied economists and investors for a number of years and, perhaps tellingly, is now increasingly earning public acknowledgment among the highest echelons of Chinese officialdom.

Li Keqiang, for example, began 2012 by once again underlining the need for China to find new economic drivers. This has been a consistent theme for the vice premier, who expressed similar sentiments in a major speech last year and also outlined the country’s long-term vision in a landmark presentation at the 2010 World Economic Forum in Davos.

His latest address called for further restructuring and innovation to help tackle challenging conditions at home and abroad. Not for the first time, Mr Li identified urbanisation as a key strategy, revealing the government is to extend basic public services to encourage qualified migrant workers to settle in cities. He also urged China to promote the development of advanced manufacturing, emerging strategic industries and the modern tertiary sector. The ultimate aim, he said, should be to “transform” the way in which China propels its economic expansion.

Of course, Mr Li has a record of championing economic transformation. When he became governor of Henan in 1998, aged just 43, he famously travelled around the troubled province as part of his attempts to conceive a solution to its mounting problems. Henan had broken into the top 20 of the national GDP rankings by the time he moved on in 2004.

According to a new study by the Nottingham School of Economics’ Globalisation and Economic Policy Centre (GEP), such a willingness to examine the situation at a more parochial level could play a valuable part in shaping China’s future strategy to optimum effect.

Central to this is the role of foreign direct investment (FDI), whose importance to the Dragon’s remarkable ascent is universally accepted but by no means perfectly understood.

The implications of the study should be of interest not just to economists. By focusing on the level and spread of FDI in each manufacturing sector within a province, as opposed to the level and spread of FDI merely in the province itself, China’s policymakers would be able to pay far closer and more instructive attention to the various drivers of economic development around the country.

A thorough appreciation of precisely how and why the changing economic and industrial structure of, say, Jiangxi differs from that of, say, Beijing could help design policies that will attract the best-suited industries to each and every province.

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