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Evaluation of Investment Environment of Foreign capitals Of Old Industrial Bases in Northwest China Liu Yingnan, Jiang yapeng School of Management, ShenYang University of Technology, P.R.China, 110023 Abstracts The well investment environment is a strong “magnetic field” of attracting the foreign capitals. This article employs empirical research methods to analyze the factors that influence foreign direct investment, evaluates investment environment of old industry bases in Northeast, draws conclusion and gives advice on how to improve investment environment. Keywords Foreign capitals, Investment environment, Old industrial bases in northeast 1 Introduction The well investment environment is a strong “magnetic field “of absorbing the foreign capitals in a country or an area. Countries all over the world have evaluated and monitored their investment environment by utilizing all kinds of index since 1960s. Now it has been a main means to evaluate investment environment by employing evaluating index and evaluating methods for the purpose of attracting the inflow of fund and promoting society economic sustainable development for countries all over the world. It is generally acknowledged that the evaluation system of investment environment of a regional should include eight factors as following: natural geographical environment, environment for the basal installment, service environment of the government, political and lawful environment, economic cultural environment, market operating environment, industrial development environment and technological innovative environment. This article will analyze the factors that would be concerned with by investors, adopt the empirical research methods to assess the investment environment for the foreign investors of old industrial bases in Northeast. We will compare it with Guangdong and Shanghai to make old industrial bases in Northeast improve the investment environment further. 2 Data sources and research approach In this article, we will research the critical factors that would influence foreign direct investment (FDI) in Northeast. We select the statistical data from 1995 to 2003, which are drawn from “Chinese economic yearbook “(1996-2004). We adopt the method of principal component analysis. (1) Pick out major factors that have greater influence on direct foreign investment at first; (2) Adopt the method of principal component analysis to conduct factor analysis, which can avoid multiple collinearity of all factors. (3) Educe the internal structure of investment environment by the way of factor loading and maximal variance, then we can calculate the score of internal structure and the comprehensive score of the investment environment each province or city. 3 Analyses 3.1 Theoretical assumption and analysis of correlation There are a lot of factors influencing area investment environment, so by using result of the papers before for reference and considering availability of the information of provinces and cities as well as the objectivity, substitution and no otherness of the index variable, we think that GDP, SP, TP, IE, SR, LP, RD, PT and PO would have influence on the trend of FDI. 3.1.1 Theoretical assumption Before the evaluation on the investment environment in Northeast, we need to make the relativity analysis on above influencing factors, and firstly make some assumptions on factors of influencing the 911 quantity of foreign direct investment as follow: GDP( unit: Ten thousand yuan): Gross domestic product, reflects the economic scale and market capacity of a region .we suppose it is positive correlation between the GDP and FDI. SP( unit:%): The ratio of the state-owned industry production value to the total industry production value, being used as the index instead of the degree of market growth. Generally, the more the ratio, the more obstacles are when foreign traders make direct investment. We suppose there are negative correlation between SP and FDI. TP( unit:%): The TP represent the ratio of the third industry production value to GDP. The third industry includes a lot of respects, such as finance, information, transportation, physical distribution etc, TP reflects degree of these industries development. We suppose there are positive correlation between the TP and the FDI. IE( unit: Ten thousand dollars): Regional import and export total amount reflects the foreign trade degree in a region. We suppose there are positive related between the IE with FDI. SR( unit: A hundred million yuan): The retail sales of social consumable goods, reflects market demand and consumption scale in a city, the favor of foreign traders is the region in which market demand is big and consumption level is high. Supposed there are positive correlative between the SR and FDI. LP(unit: yuan/ person Year): Labor productivity, reflects the production efficiency and the ability of creation value of a region, The more labor productivity, the more attractive for the foreign investors. Supposed there are positive correlative between the LP and FDI. RD( unit: kilometer/ square kilometers):Traffic density, as a index that measures the degree of transportation development of the region expresses that the level of the transportation connection of the region. Supposed there are positive correlative between the RD and FDI. PT( unit: Hundred millions Yuan): Quantity of the post and telecommunication business reflects level of the foundation facilities of the region. The better communication facilities are, the more helpful to attract foreign capitals. Supposed there are positive correlative between the PT and FDI. PO: The policy fictitious variable, generally, separately is 0 or 1 according to which the city is enjoying the special policy or not due to there are certain differences in enjoying preferential policy and the independence power in the different cities. The region that enjoys preferential policy can attract more foreign investors to make investment. Supposed there are positive correlative between the PO and FDI. 3.1.2 Analysis of correlation Through SPSS software, we carry out correlation analysis between above every influencing factor with FDI. The result is showed in Tab 1: ① ② ③ ④ ⑤ ⑥ · ⑦ , ⑧ ⑨ Tab 1 Correlation analysis result GDP SP TP IE SR LP Pearson Correlation Sig. 2-tailed Pearson Correlation Sig. 2-tailed Pearson Correlation Sig. 2-tailed Pearson Correlation Sig. 2-tailed Pearson Correlation Sig. 2-tailed Pearson Correlation Sig. 2-tailed ( ( ( ( ( ( 912 ) ) ) ) ) ) FDI .922** .000 -.729** .000 .284 .059 .939** .000 .931** .000 .196 .197 Pearson Correlation Sig. 2-tailed Pearson Correlation Sig. 2-tailed Pearson Correlation Sig. 2-tailed ( ( ( RD PT PO ) ) ) .546** .000 .847** .000 .761** .000 Note: Given marked level 1%(2-tailed) From Tab 1, we can find out that each factor is related with FDI. Among them GDP, IE, SR, RD, PT and PO are markedly positive correlative with FDI. The SP is markedly positive correlative with FDI. It is basically consistent with theoretically estimate. They are all important factors to decide the distribution of the foreign direct investment in Chinese each city. TP and LP are also positive correlative with FDI but the correlation is not notable. Consequently, both are not the important factor. , 3.2 Factor analysis of investment environment We extract the importance factors that influence FDI each province or city to carry on the principal component analysis. These variables mainly contain GDP, SP, IE, SR, RD, PT and PO. We extract the importance factors that influence FDI each province and city to carry on the analysis, these variables mainly contain GDP, SP, IE, SR, RD, PT and PO. By SPSS software to carry on factor analysis, the examine value of KMO sampling appropriate ups to 0.789, Bartlett ball degree examines provided accompanying probability0.000, which is smaller than significant levels 0.05, so refuse zero assumption of Bartlett ball degrees examine. These numbers indicate the factors that we select are relatively suitable for principal component analysis. Initial eibenvalue of every factor and contribution rate of variance is shown as Tab 2. According to the cumulative contribution rate of initial eigenvalue to all eigenvalue greater than or equal 100%, we can determine m =2, two principal components are express in formula (3. 1), (3. 2): F1=0.297GDP+0.041SP+0.246IE+0.301SR-0.242RD+0.356PT-0.143PO 3.1 ( ) (3.2) F2=-0.100GDP-0.301SP-0.028IE-0.104SR+0.542RD-0.192PT+0.438PO Entering every variable standardized, we can get the investment environment index of every city as (3. 3): E =5.372 F1+1.113 F2 Factor 1 2 3 4 5 6 7 (3. 3) Tab 2 Initial eibenvalue and contribution rate of variance Contribution rate of variance Cumulative contribution rate of Initial eigenvalue % variance % 5.372 76.738 76.738 1.113 15.895 92.634 0.318 4.539 97.172 0.118 1.679 98.851 0.048 0.686 99.537 0.028 0.400 99.938 0.004 0.062 100.000 ( ) ( ) 3.3 Analysis internal structure of investment environment We can find out internal structure of investment environment extremely from varimax orthogonal 913 rotation factor loadings (See Tab 3). variable factor GDP SP IE SR RD PT PO Tab 3 Factor loadings and rotating factor loadings 1 2 1 0.947 0.288 0.928 -0.819 0.300 -0.471 0.961 0.190 0.880 0.950 0.295 0.935 0.722 -0.643 0.186 0.897 0.410 0.962 0.809 -0.485 0.352 2 0.343 -0.734 0.429 0.339 0.949 0.216 0.875 We can observe that from Tab 3: (1) GDP, SP, IE, SR, PT own greater load with the first factor, from economic meaning, the capacity of market, the degree of market development, foreign trade, market demand, communication level, etc. can be summarized as the macroeconomics environment; (2) RD, PO have heavy load with the second factor, from economic meaning, traffic condition and favorable policy can be summarized as the microeconomics environment. So, the investment environment of the province or city can be subdivided into two respects: the macroeconomics environment and microeconomics environment. 3.4 Investment environment index of the province and city Through taking standardized variable into the expression formula of principal component, we can get the score of investment environment of the province and city and primitive score of the internal structure. The result is shown as Tab 4. Prince Times Total Liaoning Macro Micro Total Jilin Macro Micro Total Heilongjiang Macro Micro Total Guangdong Macro Micro Total Shanghai Macro Micro Tab 4 The score of investment environment and the internal structure 1995 1996 1997 1998 1999 2000 2001 -0.970 -0.871 -0.766 -0.646 -0.726 -0.604 -0.106 -0.492 -0.401 -0.278 -0.179 -0.045 0.185 0.153 -0.478 -0.470 -0.488 -0.467 -0.682 -0.789 -0.259 -1.496 -1.443 -1.489 -1.345 -1.231 -1.003 -0.896 -0.758 -0.713 -0.667 -0.641 -0.587 -0.535 -0.553 -0.738 -0.730 -0.822 -0.704 -0.644 -0.468 -0.343 -1.489 -1.395 -1.324 -1.253 -1.420 -1.339 -1.396 -0.544 -0.469 -0.390 -0.327 -0.249 -0.102 -0.087 -0.945 -0.926 -0.934 -0.926 -1.171 -1.237 -1.310 0.989 1.201 1.529 1.693 1.781 2.252 2.613 0.124 0.355 0.705 0.988 1.354 1.957 2.192 0.865 0.846 0.824 0.705 0.427 0.295 0.421 0.143 0.286 0.490 0.619 0.499 0.960 1.428 -1.125 -1.011 -0.904 -0.800 -0.626 -0.647 -0.677 1.268 1.297 1.395 1.419 1.125 1.606 2.105 2002 0.026 0.299 -0.273 -0.850 -0.481 -0.369 -1.161 0.021 -1.182 3.041 2.770 0.271 1.614 -0.519 2.133 2003 0.175 0.432 -0.256 -0.679 -0.378 -0.300 -1.049 0.122 -1.171 3.700 3.735 -0.035 1.908 -0.208 2.115 4 Conclusions From hereinbefore analyses, we can descry that the investment environment score of each region is ascending, indicating the investment environment of each region is gradually getting perfect. From the macroeconomic aspect, the main motivation of foreign capital entering China in 1990s is taking possession of local market. In order to keeping regional advantage of attracting foreign capital, it’s necessary to continuously keep on a rapid economic growth rate, which can bring “accelerator” ① 914 effect. The reason for notable foreign investment promotion achievement of Guangdong in 90’s is mainly because of its excellent macroeconomic environment which attracting foreign capital. From the microeconomic aspect, it indicates from the internal structural transformation of each province and city’s investment environment, as time lapsing, the effect of microeconomic environment to investment environment is increasing. Recent years, foreign direct investment in Yangtze delta region increased dramatically, especially in Shanghai that put stress on construction of microeconomic investment environment. We can obviously find from the data in Tab.4, the score of Shanghai microeconomic environment climb rapidly, hence boost the total score of its investment environment. To different region, because of the differences in locations and economic development of each province and city, there are huge discrepancies of internal structure of investment environment. Guangdong and Shanghai has made biggish progress on improving investment environment, the investment environment of three provinces in Northeast are evidently getting behind with Guangdong and Shanghai, furthermore, the improving progress of investment environment of the three provinces in Northeast are slow, particularly Jilin and Heilongjiang. Every year of Liaoning, the macroeconomic environment score are higher than the microeconomic ones, and rising rate of macroeconomic environment score is higher than the microeconomic one. Every year of Jilin, the macroeconomic environment score are almost the same with the microeconomic ones, and the score rising rate of both macroeconomic environment and microeconomic environment are slow. Every year of Heilongjiang, the macroeconomic environment score are higher than the microeconomic ones, and microeconomic environment score is downtrend. Thereby we know that Liaoning and Heilongjiang has paid more attention on macroeconomic environment in recent years, and Jilin improved its investment environment very slow. ② ③ 5 Suggestions on how the old industrial bases in Northeast improve investment environment Comparatively, Liaoning’s investment environment is better, but there is still something to do for improvement, especially to accelerate microeconomic environment improving progress; the investment environment of Jilin and Heilongjiang are not satisfactory, comparing to other provinces, the gaps are extensive. Therefore, the investment environment in the northeast region is awaiting more melioration. ① ② ③ ④ 5.1 Improving the macroeconomic environment of foreign investment Expedite state-owned enterprises reform step in northeast regions and establish perfect market economy system. Accelerate industry structure adjustment and industry structure upgrade, utilize foreign capital to develop equipment manufacturing and hi-tech industries, promote the formation of industry group. Quicken the development of third industry, particularly service business, to attract more foreign capital injection. Reinforce the infrastructure construction and boost the communication facilities in northeast region. ① 5.2 Improving the microeconomic environment of foreign investment Accelerate stock system rebuild of the northeast region state-owned enterprises, perfect the corporate governance structure, implement mix ownership economy, buildup vigor of market entity, promote core compatibility of northeast enterprises. Strengthen human resources development in northeast region, continuously improve labor force quality, and increase the labor productivity. Establish excellent soft environment of investment policy, transfer government function, improve service level, increase the transparency of policies, simplified foreign investment approval procedure, enhance service efficiency to foreign investor, administrate strictly according to laws, ensure ② ③ 915 foreign invested enterprises’ legitimacy rights. References . [1] Grub,Pillip, Donald, Foreign direct investment in China, New York, H.Y, 1997. [2] Steiner,P.O, Evidence on real gain corporate acquisitions, Journal of economics and business, 1996. 916