Exports, Foreign Direct Investment and Economic Development in China

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Exports, Foreign Direct Investment and Economic Development in China Xiaolan Fu Centre for Business Research University of Cambridge

ª Xiaolan Fu 2004 Foreword ª Alan Hughes 2004 Softcover reprint of the hardcover 1st edition 2004 978-1-4039-3644-8 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted her right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries.

ISBN 978-1-349-51861-6 ISBN 978-0-230-51483-6 (eBook) DOI 10.1057/9780230514836 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Fu, Xiaolan, 1967– Exports, foreign direct investment and economic development in China / by Xiaolan Fu. p. cm. Includes bibliographical references and index. 1. China—Commerce. 2. Exports—China. 3. Investments, Foreign—China. 4. International business enterprises— China. 5. China—Economic conditions. I. Title. HF3834.F82 2004 2004043623 3820 .60 0951—dc22 10 9 13 12

8 7 6 5 4 11 10 09 08 07

3 2 1 06 05 04

To my parents, my husband and my son

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Contents

List of Tables

x

List of Figures

xiii

Foreword by Alan Hughes

xiv

Acknowledgements

xvi

List of Abbreviations

xviii

1

Introduction

2

Exports and Economic Development: Early Debates and Recent Controversies 2.1 Introduction 2.2 The impact of exports on economic growth: theoretical studies 2.3 The ‘engine of growth’ theory and its relevance in the twenty-first century 2.4 Exports, income distribution and the ‘impoverishment’ school 2.5 Preconditions for successful export-led growth 2.6 Conclusions

3

4

1 6 6 7 13 15 20 22

Empirical Studies on Exports and Development 3.1 Introduction 3.2 Empirical studies on exports and growth 3.3 Empirical studies on exports and productivity 3.4 Studies in the China context 3.5 Conclusions, research questions and research methodology

25 25 25 31 32

The 4.1 4.2 4.3 4.4

45 45 45 53 55

Exports of China: An Overview Introduction Export promotion policies Growth profile Commodity composition vii

42

viii Contents

4.5 Market distribution 4.6 Regional fragmentation 4.7 Growth of processing trade 4.8 Exports of FIEs and TVEs 4.9 Linkages between exports, FDI and imports 4.10 Revealed comparative advantage 4.11 Conclusions Appendix: RCA and China’s exports

59 60 61 64 69 70 72 73

5

Exports, FDI and Employment Growth in China 5.1 Introduction 5.2 The ‘vent-for-surplus’ model 5.3 Surplus in China 5.4 Exports of TVEs and FIEs, and vent-for-surplus labour 5.5 Empirical evidence 5.6 Conclusions Appendix 1: Output and consumption growth Appendix 2: Factor content of China’s exports

76 76 76 81 86 87 92 93 94

6

Exports, Technical Progress and Productivity Growth in Chinese Manufacturing Industries 6.1 Introduction 6.2 Exports, technical progress and efficiency improvement: a theoretical framework 6.3 Methodology 6.4 Data and results 6.5 Conclusions Appendix: Labour productivity

7

Exports, FDI, Linkages and Regional Income Inequalities in China 7.1 Introduction 7.2 Linkage and migration effects of exports and regional income inequalities: a theoretical framework 7.3 The linkage and migration effects of exports in China 7.4 Empirical evidence 7.5 Conclusions Appendix 1: GDP per capita in China Appendix 2: Convergence of the coastal regions to the South East Asian economies Appendix 3: Lorenz curves, by regions Appendix 4: Linkages from processing-type export activities: input–output analysis, Guangdong Province

97 97 98 101 105 117 118

120 120 123 125 132 138 140 140 141 141

Contents ix

8

9

10

Trade-cum-FDI, Human Capital Inequality and the Dual Economy in China 8.1 Introduction 8.2 The Singer Hypotheses 8.3 Trade-cum-FDI, human capital inequality and the dual economy in China 8.4 Empirical evidence 8.5 Conclusions

146 146 147 149 160 164

Exports and the Success of TVEs 9.1 Introduction 9.2 Characteristics of TVEs 9.3 Productive efficiency of TVEs 9.4 Sources of productive efficiency 9.5 Conclusions Appendix 1: Ownership structure Appendix 2: Data sources and variable measurement Appendix 3: International comparison of productive efficiencies

166 166 166 169 173 181 182 182

Conclusions 10.1 Major findings of the study 10.2 Implications of China’s accession to the World Trade Organization 10.3 Issues for further research

187 187

183

190 192

Notes

194

Bibliography

201

Index

219

List of Tables

2.1 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4A.1

Growth of world demand for selected labour-intensive manufactures Studies of exports and growth in the China context Studies of regional disparity in China Real exchange rate of the RMB, 1990–8 Total value and growth of goods imports and exports, 1980–2000 Top 15 product groupings of China, by export growth, 1990–7 Value of exports, by category of commodities, Customs Statistics,1980–2000 Product composition of Exports, China, 1980–2000 Top 10 product groupings, China, by export value, 1990–7 Hirschman concentration index for export composition, China, selected years Hirschman concentration index for export markets, China, selected years Total sum of imports and exports, Chinese provinces/ cities, 1999 Growth of exports, China, 1980–2000 Trade mode of machinery and electronic products, China, 1998 Processing trade, FIEs, 1999 Imports and exports, FIEs, 1980–2000 Exports of machinery and electronic products, by enterprise ownership, 1998 Commodity composition of exports, FIEs, 1991–9 Country distribution of exports and imports, FIEs, 1999 Correlation coefficient matrix, exports, imports and FDI, China, 1984–2000 Balance of payments, China, 1982–99 Top 20 Chinese export product groupings, by RCA, 1997 RCA of export commodities, China, 1990–7 x

14 34 38 48 53 55 56 57 59 59 60 62 63 64 65 66 66 67 68 69 71 72 73

List of Tables xi

5.1 5.2 5A.1 5A.2 5A.3 6.1 6.2 6.3 6.4 6.5 6.6 6A.1 7.1 7.2 7.3 7.4 7.5 7.6 7A.1 7A.2 8.1 8.2 8.3 8.4 8.5 9.1 9.2

Idle production capacity, Chinese manufacturing sector Employment equations, TVEs, 1987–99 Output and consumption growth index, China, 1978–99, 1978 ¼ 100 Factor content of net manufacturing exports, China, 1997 Comparison of the factor intensity, export and non-export industries, China, 1995 Characteristics of Chinese manufacturing industries TE of export and non-export industries, 1990–7 Scale efficiency of Chinese manufacturing industry, 1990–7 Annual average of Malmquist TFP index, 1990–7 Malmquist TFP index, by industry, 1990–7 Determinants of TFP growth in Chinese manufacturing: estimation results Comparison of labour productivity using official and non-official data Real GDP per capita, coastal and inland regions, 1952–99 Exports and FDI, by regions, 1999 Differences between exports, by origin and location of trade companies Exports and growth: panel data estimation results FDI, exports and immigration, coastal regions, 2000 Impact of emigration on the income gap between coastal and inland regions: estimation results Exports, by ownership and trade mode, Guangdong Province, 1990–8 Backward linkage coefficients, China and Guangdong Province, 1997 Industrial structure, inland and coastal regions, 1999 GDP, inland and coastal regions, by expenditure approach, 1999 Regional distribution of total loans, all financial institutions, 1990 and 1999 Correlation coefficients between economic structure and human capital Determinants of the income gap between coastal and inland regions: estimation results Industry characteristics, TVEs and SOEs, 1995 Major exporting industries, TVEs, 1995

85 91 93 95 96 107 110 112 113 114 115 118 121 126 129 135 136 137 143 144 152 155 158 162 163 168 169

xii

List of Tables

9.3 Performance of TVEs, sectoral analysis, 1995 9.4 Estimation results of determinants of productive efficiency for pooled data 9.5 Estimates of labour productivity, TVE and SOE sectors 9.6 Wald tests of equality of estimated coefficients between TVE and SOE equations 9.7 Estimates of TE, TVE and SOE sectors 9A.1 Ownership structure of Chinese enterprises in 1995

173 179 180 180 181 182

List of Figures

2.1 Gains from exchange and from specialization 2.2 Exports and economic development: the transmission mechanisms 4.1 Foreign exchange rate of the RMB, 1981–2000 4.2 Exports–GDP and imports and exports–GDP ratio, China, 1978–2000 4.3 Share of exports in world trade, China, 1980–2000 4.4 Export composition, China, 2000 4.5 Market distribution of exports, China, 1999 4.6 Exports, TVEs, 1988–99 4.7 Export composition, TVEs, 1999 5.1 Gains from FDI-based exports with surplus labour 5.2 Marginal product of labour, agricultural sector 5.3 Marginal product of labour, industrial sector 5.4 Employment distribution, China, 1978–2000 5.5 Employment growth and capital accumulation, SOE sector, 1980–2000 5.6 Output and consumption index at 1978 prices, 1978–99 7.1 Real GDP per capita, coastal and inland regions, 1952–99 7A.1 China’s golden coast, 1998 7A.2 GDP per capita in ppp terms, coastal regions in China and South East Asian ‘Dragons’, 1978–98 7A.3 Lorenz curves 8.1 Real GDP per capita, coastal and inland regions, 1978–98 8.2 Transactional values of technological markets, by regions, 2000 8.3 Human capital inequality vs income inequality 9.1 Illustration of the data envelopment approach 9.2 Comparative performance of TVEs and SOEs, 1995 9A.1 International comparison of unit wage costs 9A.2 International comparison of technical efficiency, 1995

xiii

9 23 46 54 54 58 61 68 69 78 80 80 82 83 84 122 140 141 142 150 153 154 170 172 184 185

Foreword

Two decades of industrial and policy reform in China have been accompanied by remarkable economic growth, and increasing integration into the world economy in terms of both exports and inward foreign direct investment (FDI). This sustained performance has led both policy-makers and academics to ask searching questions about the relationship between trade, FDI and China’s economic performance. The answers to these questions have been made even more pressing by China’s accession to the World Trade Organization. The extent to which China’s enterprises and industries are equipped to meet increasingly open international competition, and the mechanisms by which its effects will be transmitted through the Chinese economy, are clearly important issues to address. In this timely and important book Xiaolan Fu does just this. She uses an appropriate mixture of careful qualitative institutional and policy analysis and complementary econometric analyses of industry and region level data to throw into question future policy nostrums based on the unalloyed benefits of increased openness and free market competition. Her careful analysis of the conventional transmission mechanisms by which exports may lead to efficiency in production and innovation (such as competition and resource reallocation) shows them to have been relatively weak in explaining recent economic performance. She also demonstrates that the process of industrial growth has been accompanied by growing disparities between the inland and coastal regions of China, and that increasing inequality in human capital is one of the major transmission mechanisms involved. Finally, she demonstrates the important role that smaller village and township based enterprises have played in recent economic transformation and discusses thier actual and potential role in international trade. They, and China’s largest businesses in key trading sectors, must compete in a world economy increasingly dominated by large Western multinationals and their increasingly xiv

Foreword xv

integrated and orchestrated value and supply chains. Whether they can do so, and the nature and extent of government support required, is the key industrial policy issue facing China in the coming decade. ALAN HUGHES Margaret Thatcher Professor of Enterprise Studies Director ESRC Centre for Business Research Judge Institute of Management University of Cambridge

Acknowledgements

This book grew out of my PhD thesis that I finished at Lancaster University. I owe a great intellectual debt to my supervisor, Professor Vudayagi N. Balasubramanyam for his invaluable guidance and support. He inspired my interest in trade, foreign direct investment (FDI) and economic development. I have benefited much from his great erudition and acute thinking. Professor Wing They Woo of California University provided me with invaluable research information, his comments helped to deepen my understanding of the Chinese economy. Professor Alan Hughes and Dr Andy Cosh of the Centre for Business Research at the University of Cambridge provided great support and encouragement during the final stages of preparing the book. Professor Alan Hughes has also kindly written the Foreword. Dr Nick Snowden, Professor Xiamin Liu and Dr Mahammed Salisu read the whole draft and gave me critical and constructive comments. I also received many useful comments from Professors John Bonin and Shujie Yao on a research paper investigating regional disparities; and Professor David Sapsford, Dr Yingqi Wei, Mr David Brown, Dr Jill Jones, Dr Shaojia Liu and Professor Steve Bradley on a research paper discussing Township and Village Enterprises (TVEs). I would like to thank all my former teachers and friends, in particular, Professors Maurice Kirby, Jiaji Xuan, Yurui Wu, Yinguo Ren, Ms Helen Towers, Dr Yilin Yu, Dr Philip Bolton and my colleagues at the Centre for Business Research for their help and support, and Mr Keith Povey for careful editorial assistance. I am grateful to the Centre for Business Research of Cambridge University, Lancaster University Management School and the Peel Trust Fund for providing financial support. I would also like to thank the Journal of Development Economics and the Journal of Comparative Economics for permission to include my published papers in this book, the Economist Intelligence Unit for permission to reproduce a map of income distribution in China, and also Professor V. N. Balasubramanyam for allowing me to include part of two co-authored papers. The support of the Senior Commissioning Editor of Palgrave Macmillan, Amanda Watkins, was essential for the publication of the book. xvi

Acknowledgements xvii

Finally, I can hardly express the debt of gratitude I owe to my parents, my parents-in-law and my sister for their love and support. My heartfelt gratitude goes to my husband, Shaohui and my dearest son, Yujie, for their great love and understanding. Without their support, the book would not have come to fruition. XIAOLAN FU

List of Abbreviations

2SLS 3SLS CCP COE CPI CRS DEA DMU ECGD EDFZ EDZ ELG EP EPZ ERIC EU FDI FIE FTC GDP GMM HTDZ IEBC IFS IIT ILO IS IV JV LDC MNE MOFTEC NBER NIE

Two-stage least squares Three-stage least squares Chinese Communist Party Collective-owned enterprise Consumer price index Constant returns to scale Data envelopment analysis Decision making unit Export Credit Guarantee Department Export duty-free zone Export development zone Export-led growth Export-promotion (strategy) Export-processing zone Export Risks Insurance Corporation European Union Foreign direct investment Foreign-invested enterprise Foreign trade corporation Gross domestic product General method of moments High-technology development zone Import & Export Bank of China International Financial Statistics Intra-industry trade International Labour Organization Import-substitution (policies) Instrumental variable Joint venture Less developed country Multinational enterprise Ministry of Foreign Trade and Economic Cooperation National Bureau for Economic Research Newly-industrialized country xviii

List of Abbreviations

NPL NTB OECD OLS OT PBC PMP PPP QR R&D RCA RER RMB SEZ SITC SME SMP SOE SSB SURE TE TFP TVE UNIDO VRS WTO

xix

Non-performing loan Non-tariff barrier Organisation for Economic Co-operation and Development Ordinary least squares Ordinary trade People’s Bank of China Private marginal product Purchasing power parity Quantitative restriction Research and development Revealed comparative advantage Real exchange rate Ren Min Bi (Chinese yuan) Special economic zone Standard international trade classification Small and medium enterprise Social marginal product State-owned enterprise State Statistical Bureau of China Seemingly unrelated regression equations Technical efficiency Total factor productivity Township and village enterprise United Nation Industrial Development Organization Variable returns to scale World Trade Organization