A Research On The Effects Of China's OFDI On Domestic Industrial Structure

Since the reform and opening up, China's foreign economy and trade have developed rapidly, particularly in international trade and Foreign Direct Investment (FDI), which have been in the forefront of the world, not to mention their roles in promoting China's economic development. However, China's Outward Foreign Direct Investment (OFDI) is still in the situation of lagging behind the development. Although China's government has said explicitly to encourage domestic enterprises to "go out", the effects of OFDI on China's domestic economy are still highly controversial. This paper, based on the previous studies, aims to analyze the economic impact of China's OFDI on the domestic industrial structure, and verifies it by a empirical test.Throughout the development process of China's OFDI, because of Marxism which was deeply rooted in our country, at the beginning of the reform and opening up, people's ideas have not changed a lot. They still insisted that the multinational corporations were the instruments of economic expansion and colonialism from the capitalist countries. There were still serious prejudice in the political and ideological understanding of multinational corporations and international direct investment. These resulted in the slow development of China's OFDI during this period. With the increase in awareness and changing of ideas, the growth of China's OFDI has gradually accelerated, and in 1993 China's OFDI flows was$ 4.4 billion and the stock reached$ 13.768 billion. But seven years since then, due to the impact of policy and economic situation, China's foreign direct investment has remained hovering in the$ 2 billion. After 2001, the improved economic situation and the introduction of policies from China's government to encourage OFDI contributed greatly to the development of foreign direct investment. By 2010, China's OFDI flows have grown to$ 68.811 billion, and the stock to$ 317.211 billion.Although the volume of China's OFDI has already been a relatively large scale after 30 years of development, there are still a lot of deficiencies from the qualitative point of view. As to the industries of investment, a large part of it flows to the mining industry, commercial and service industry, most of which belong to the low value-added industries. On the contrary, those industries, which play greater roles in promoting China's industrial structure get much less investment. Investment stock in manufacturing by 2009 was$13.59 billion, accounting for only 5.5% of the total stock, and industries of scientific research, technical services and geological prospecting got$28.7 billion, accounting for only 1.2% of the total. As for the destination, China's investment mainly concentrates in developing countries of Asia, Africa and Latin America, with the stock of developed countries little. At the same time, the destinations of a large part of investment, for example, Virgin Islands and Cayman Islands are recognized as tax havens. As the purpose of this part of the capital is apparently not appreciation but tax avoidance, it has no good at all for the promotion of domestic industrial structure.At the beginning, this paper analyzes the four kinds of effects of OFDI on home country's industrial structure. They are the output value structure promotion effect, the asset structure promotion effect, the technology structure promotion effect and the employment structure promotion effect. And it analyzes the adverse effects of it. In the study of China's OFDI, we find that China's OFDI have had a role in promoting the China's import and export, technological progress, employment and resources supply, but because of the structural characteristics of China's OFDI in industries, destinations and investors there are some limitations in promoting upgrading of domestic industries.Subsequently, this paper sets a determination model of China's industrial structure to test the dependence relationship between the OFDI and the industrial structure. The results of co-integration and Granger test show that China's OFDI and industrial structure upgrading have a two-way role in promoting. That is to say, on the one hand, China's OFDI is able to promote the upgrading of industrial structure, on the other hand, domestic upgrading of industrial structure also contributes to the conduct of foreign direct investment. Finally, this paper puts forward several recommendations for China's enterprises and the government on the issues of OFDI found during the research In order to make China's OFDI and the industrial structure could get better development under the two-way driving force.