Foreign direct investment in the People's Republic of China

China's rapidly growing inward FDI has been initiated in five main ways. These are: moves stemming from family relations; Chinese government initiatives; action by China-based establishments registered abroad; action by local Chinese firms in search of a partner; and action by the foreign investor. Most of China's inward FDI has been made by ethnic Chinese businessmen who are motivated by family and local connections. Joint ventures are the basic organisational form of FDI, and conglomerate integration is an important phenomenon in China. These peculiar features of China's inward investment not only pose a challenge to the currently dominant theories of FDI, but also have important implications for China's FDI policy. As for the theoretical challenge, the data obtained from our fieldwork and library research go beyond the range of possibilities explained by these theories, and therefore, a general analysis is developed, which is believed to extend the range of possibilities to be considered, and is used to incorporate the FDI determinants that appear to be important in China. The need to explain the motives of the local partner as initiator requires some of the questions answered by existing theories to be turned on their heads, and the importance of family and local connections in reducing transaction costs in FDI is probably unique to China. Conclusions reached on policy are that an attempt should be made to achieve greater stability in policy; that discrimination between areas for foreign investment purposes should be removed; that closer approaches to convertibility will enhance the case for removing the residual bias in policy toward exporting and requirements for foreignexchange "balance"; that, though the very large tax discrimination in favour of foreign firms and joint ventures as against local firms will undoubtedly be reduced, it has probably played a valuable role in leading local firms to find foreign partners and should not be removed entirely without careful consideration; and that correspondingly important questions are raised about whether investment from Hong Kong should be treated as domestic or foreign after 1997.China's rapidly growing inward FDI has been initiated in five main ways. These are: moves stemming from family relations; Chinese government initiatives; action by China-based establishments registered abroad; action by local Chinese firms in search of a partner; and action by the foreign investor. Most of China's inward FDI has been made by ethnic Chinese businessmen who are motivated by family and local connections. Joint ventures are the basic organisational form of FDI, and conglomerate integration is an important phenomenon in China. These peculiar features of China's inward investment not only pose a challenge to the currently dominant theories of FDI, but also have important implications for China's FDI policy. As for the theoretical challenge, the data obtained from our fieldwork and library research go beyond the range of possibilities explained by these theories, and therefore, a general analysis is developed, which is believed to extend the range of possibilities to be considered, and is used to incorporate the FDI determinants that appear to be important in China. The need to explain the motives of the local partner as initiator requires some of the questions answered by existing theories to be turned on their heads, and the importance of family and local connections in reducing transaction costs in FDI is probably unique to China. Conclusions reached on policy are that an attempt should be made to achieve greater stability in policy; that discrimination between areas for foreign investment purposes should be removed; that closer approaches to convertibility will enhance the case for removing the residual bias in policy toward exporting and requirements for foreignexchange "balance"; that, though the very large tax discrimination in favour of foreign firms and joint ventures as against local firms will undoubtedly be reduced, it has probably played a valuable role in leading local firms to find foreign partners and should not be removed entirely without careful consideration; and that correspondingly important questions are raised about whether investment from Hong Kong should be treated as domestic or foreign after 1997