Download The Comparison Analysis of the FDI Performance and Potential

The Comparison Analysis of the FDI Performance and Potential
between Dalian and Shanghai
1
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WANG Qian1 SUN Xiaoyu2, XU Ya Nan1
College of Business and Administration, Zhejiang University of Technology, P.R.China
2
Daliang Zhigong College
[email protected]
Abstract This paper applies the FDI performance index and the FDI potential index; make a
comparison analysis on the performance and potential of FDI in Dalian and Shanghai for the period of
1995 to 2004. For the FDI performance index, Dalian and Shanghai are both with the value above one,
which indicates the excellent performance for both cities. However, Dalian is more successful in
attracting FDI than Shanghai. For the FDI potential index, Dalian and Shanghai are both above the
mid-point ranking, which means they have good potential and competition ability of attracting FDI in
the future. At the end, the conclusion and suggestion for improving the competition ability of inducing
FDI are included.
Key Words FDI, Performance index, Potential index, Dalian
1. Introduction
Dalian is the leading city of attracting foreign capital in Liaoning province. Dalian utilized the foreign
capital is up to $2.56 billion in 2005, the central government stated that the development objective for
Dalian is to become a crucial international shipping centre in northeast Asia. Furthermore, State
Departure also confirmed the strategy position of FDI in Dalian among the northeast region in China.
Dalian is making efforts to enlarge the further open door space, creating a coastal economic band to
meet the international capital transfer, attract more foreign investment, improve the trade growth in
Dalian, strengthen the construction of the investment environment and create more comprehensive
competition advantages for Dalian. Shanghai, the biggest economic centre in China with population of
16.74 million, obtains perfect geographic location and is the third port in the world and the first port in
China. Shanghai as one of the open coastal cities is becoming a leader of the economic development of
river Chankiang delta and the Chang Jiang River area. Shanghai as the international modern city, has
modern industry, agriculture and economic development zone among Asia even in the world, is the
window for the economic development of China. Hence, it is significant to compare the performance
and the potential of FDI between Dalian and Shanghai.
2. Literature Review
In the international business literatures, the location decision has typically been addressed within the
framework of the so-called “eclectic paradigm” proposed by Dunning (1977),Dunning’s theory attempts
to offer a unified framework for determining the extent and pattern of foreign-owned activities. Dunning
Eclectic Theory of International Production considers that the firms, who engage in foreign investment
activities, have to meet the following three conditions. The three conditions can be generalized to three
sets of advantages, namely ownership advantages (O), internalization (I) and advantages location
advantages (L). Here Location-specific advantages in this framework refers to a country are based on
the resources, networks, institutional structures, or other advantages that are specific to a country.
Location advantages imply that a foreign firm finds it advantageous to locate some parts of its
operations outside its home country because of variables such as government polices relative resource
costs, or market size and growth, which means the factors, affect each other mutually. Investment
Environment (IE) has been widely considered by economists as an important external factor affecting
the success of business operations in the host country. The major environmental factors that attract
foreign investment widely discussed in the literature include size of market and its potential growth,
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supply and costs of recourses; compatibility of the host country in language, geographical proximity and
location choice, legal/ bureaucratic systems; and degree of potential political/business risks and
credibility of government. Major studies using multi-factors to provide more comprehensive discussions
of elements of investment climate and environment include Stobaugh (1969), Rolfe et al. (1993) and
Boros-Torstila,
1999 . There is widespread agreement on what determines the FDI flowing to one
country rather than another. Countries attracting large amounts of FDI generally have good economic
fundamentals; that is, they have achieved a high degree of macroeconomic and political stability and
have favorable growth prospects. They also tend to possess a good infrastructure and legal system
(including enforcement of laws), a skilled labor force, and a foreign sector that has been liberalized to
some extent (membership in free trade areas is a particular attraction). Location, country (market) size
and natural endowments are generally important as well. This paper applies the FDI performance index
and the FDI potential index; make a comparison analysis on the performance and potential of FDI in
Dalian and Shanghai for the period of 1995 to 2004.
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3. The Performance of FDI in Dalian and Shanghai from 1995-2004:
The simple way to benchmark FDI performance is to compare the absolute values of inflows or the
shares of FDI in national investment, as it is discussed in section 3.1. It is indicated that Shanghai is
better than Dalian in the total amount of FDI inflows and the contribution to the domestic economic
development. These comparisons do not, however, take into account the size of the city. It is reasonable
that the larger the size (as measured by GDP) the more FDI it will get. So an Inward FDI Index was first
introduced in WIR01 to benchmark the success in attracting FDI. In WIR02, it was simplified and
revised and was renamed as the UNCTAD Inward FDI Performance Index. So the Inward FDI
Performance Index of a city is the ratio of a city’s share in national FDI inflows to its share in national
GDP. If the index value is one means that the city’s share of FDI in the nation is equal to the city’s share
of GDP in the nation. It indicates that the city receives FDI exactly in line with its relative economic size
measured by GDP. With the index value above one, it shows that the city attracts more FDI than may be
expected on the basis of relative GDP. On the other hand, the city with index value below one may due
to various reasons such as, FDI policy design and implementation or competitive weaknesses in the
economy, which leads to the inflow of FDI is lower than it may be expected.
The inward FDI performance index is formulated as follows:
FDIi /FDIc
INDi= GDP /GDP
i
c
Where,
INDi The inward FDI performance index of the ith city. FDIi FDI inflows in the ith city. FDIc
National FDI inflows.GDPi GDP in the ith city. GDPc National GDP.
In this paper, the ten years data (see table 1) are used instead of a single year which assures the relatively
accurate result and reflects the holistic situation about FDI in Dalian. Now, according to the formulation
above, the performance index of those two cities during the 10 years period are illustrated in table 2.
After considering city size to use FDI inflow the performance index, it yields an interesting result the
average index value for Dalian and Shanghai respectively are 2.39 and 1.93, Dalian is more successful
than Shanghai in attracting FDI. These two indexes are all above one, which means Dalian and Shanghai
both, has the excellent performance in attracting FDI.
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Table 1. The data of GDP and FDI inflow in China, Dalian and Shanghai, 1995-2004
China
Dalian
Shanghai
GDP100
￥
FDI100m$
GDP100
￥
FDI100m$
GDP100
￥
FDI 100m $
1995
57494.9
375.21
645.1
7.1
2462.57
32.4996
1996
66850.5
417.25
733
10.1
2902.2
47.1578
1997
73142.7
452.57
820.6
13.2
3360.21
48.0816
1998
76967.1
454.63
926.3
12.4
3688.2
36.3786
1999
80422.8
403.19
1003.1
12.1
4034.96
30.4772
2000
89442
407.15
1110.77
13.0597
4551.15
31.6029
2001
95933
468.78
1242.39
14.54
4950.84
43.93
2002
104790.6
527.43
1418.09
16.0309
5408.76
50.3
2003
117390.2
535
1632.6
22.1126
6250.81
58.5
2004
136875.9
606.3
1961.8
22.0328
7450.27
65.41
Source: 1995-2004 China Statistical Yearbook, 1995-2004 Dalian and Shanghai Statistical Yearbook
Year
Dalian
Shanghai
Table 2. Dalian and Shanghai Inward FDI Performance Index, 1995-2004
1995
1996
1997
1998
1999
2000
2001
2002
2003
1.69
2.21
2.6
2.27
2.41
2.58
2.39
2.25
2.97
2.02
2.6
2.31
1.67
1.51
1.53
1.82
1.85
2.05
2004
2.54
1.98
Mean
2.39
1.93
The table 1 & 2 show that only in 1995 and 1996, Dalian FDI performance index is lower than Shanghai.
From 1997, Dalian is ahead of Shanghai all the time in attracting FDI. The developing trend for Dalian’s
FDI performance index is obvious that is upward but flexuous in the last decade. After the sharply
decline from 1998 to 1999, Shanghai FDI performance index is increased steadily. This implicitly
indicates the effect of other factors to which foreign investors are sensitive: macroeconomic economic
environment, the FDI policy regime, industrial competitiveness, natural and human resources, and the
like. Dalian is benefit from the excellent investment environment. Dalian has favorable geographic
location which is closed to Bohai Sea and faces to Huang Sea, locates the south of the Liaotung
Peninsula, overlooks Peninsula of Shandong, is neighbored Three Provinces of Northeast and eastern
interior regions of Inner Mongolia. Dalian is the important port, trading, industry and truism city for the
north of China even for Northeast Asia Regions. The weather of Dalian is pleasant, has maritime climate
which is suit for living. According to 2005 The Best Living City Report, Dalian ranks as the second and
shanghai is the number one city. Moreover Dalian has plenty of natural resources from metal, mineral to
land and abundant resource of water and eclectic, also convenient transports. After 1984, Dalian was
approval as the first group city of coastal opening city, and then has been awarded to having the same
authorize of economy with province level, since 1985. Economy leading regions are the special feature
for Dalian, including Economic and Technology Development Zone, Tariff Free Zone, Jin Shi Tan
National Tourism and Resort Zone and High-New Technology Industry Park. It was reported that Dalian
Development Zone is the number one city for the index of soft environment in 2002 Investigation of the
Investment Environment of 10 Development Zone.Tariff Free Zone is the unique area for tax protection
and export processing in the northeast of China and is a comprehensive economic zone which is one of
the most opening areas and has the most preferential policy in China. Dalian Tariff Free Zone refers to
the international custom and usage implements 24 hours going through customs formalities service to in
and out goods. The exceptionally welcoming regulatory regimes, well-managed macroeconomic terms,
and the efficient business environments attract many FDI in Dalian. Dalian has been one out the most
concentrative five cities for attracting foreign investment corporations, overseas company and financial
institution to establish permanent institution in China. Dalian also offers other competitive attractions:
good growth prospects, advanced infrastructure, efficient financial support or well-developed supplier
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clusters. By the end of 2004, there are more than 10 thousand foreign investment corporations, 4000 of
which has put into production in Dalian and the products has been sold to more than 170 countries and
regions in the world and has great contribution to the economy development of Dalian.
4. The FDI Potential Index of Dalian and Shanghai
The FDI potential index indicates the potential and competition ability of one city in attracting FDI. In
contrast to the performance index that is based on FDI inflows, the FDI potential index is based largely
on structural economic factors. Due to the relatively stability of these factors, the FDI potential index
values for cities tend to change fairly slowly over time and are correspond by and large to levels of
economic development. So it is reasonable to assume that the potential index for the most recent year
can reflect the actual situation at present.
There are many important factors affecting FDI. The Inward FDI Potential Index must use indicators for
key FDI determinants on which comparable data are available. In this paper, 7 indicators are chosen
form all the determination factors which affect FDI, which are the rate of growth of GDP for the last
decade; per capita GDP; share of exports in GDP; telephone lines per 1,000 inhabitants; commercial
energy use per capita; share of R&D expenditures in GDP, and share of tertiary students in the
population. The choice of these 7 variables is based on the studies on FDI determinants (WIR98;
Dunning, 1993) and the correlation study on a number of indicators which is displayed in WIR02 (See
appendix I). The correlation indexes show that each of variables considered affecting FDI on different
degree. However, the variables, that are difficult to benchmark according to the limited resource and
method, are excluded. So this set of variables does not, of course, contain all the important factors
affecting FDI. Furthermore, there are other reasons for neglecting some other factors. For example, GDP,
which represents market size as well as the overall economic strength of one city and is undoubtedly an
important determinant of FDI inflows. It has been omitted because it is considered into the Inward FDI
Performance Index. Moreover, some other factors have been excluded due to minimize the number of
variables.
The Inward FDI Potential Index is the average of the scores on the seven variables for the city
mentioned. The score for each variable is derived as follows: the value of a variable for a city is taken,
and minus it is the lowest value for that variable among the cities which take part in the assessment; then
the result is divided by the difference between the highest and lowest values of that variable among the
cities. If with the lowest value, the city is given a score of zero and the city with the highest value, get a
score of one. It is expressed as follows
Score =
Vi – Vmin
Vmax - Vmin
：
，
，
Where,Vi the value of a variable for the city i.Vmin the lowest value of the variable among the cities.
Vmax the highest value of the variable among the cities.
In this paper, 10 cities have been involved including Beijing, Shanghai, Guangdong, Jiangsu, Dalian,
Guizot, Ningxia, Hainan, Tibet and Qinghai, which are the most developed cities and undeveloped cities
respectively, in order to get the most accurate score of potential index for Dalian and Shanghai. The FDI
potential index for Dalian and Shanghai is based on the data in 2000 and 2004. On the one hand, it can
show the change trend of FDI potential over the period of time, on the other hand, to assure the
appropriate of the result. Refer to the formulation and mathematic method above, the FDI potential
index for Dalian and Shanghai is illustrated in table 3.
The average score for Dalian in 2000 and 2004 is 0.59 and 0.62, which is lower than these in
Shanghai 0.79 and 0.87. Dalian and Shanghai are both above the mid-point ranking which means they
have good potential and competition ability of attracting FDI in the future.
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Table3. The FDI potential index for Dalian and Shanghai
Dalian
Shanghai
Index comprising components
2000
2004
2000
2004
1
GDP per capita
0.68
0.73
1
1
2
Real GDP growth(for the past 10 years)
0.81
0.84
1
1
3
Exports as a percentage of GDP
0.43
0.4
0.59
0.97
4
Number of telephone lines per 1000 inhabitants
0.67
0.74
0.91
0.86
5
Commercial energy use per capita
0.55
0.58
1
1
6
R&D expenditures as a percentage of GDP
0.35
0.38
0.34
0.43
7
Students in tertiary education as a percentage of total
population
0.71
0.77
0.67
0.85
Average score
0.6
0.63
0.79
0.87
Source: 2000, 2004China Statistical Yearbook; 2000, 2004 every city Statistical Yearbook
According to the scores in table 3, the paper is given a further analysis for each variable comprising the
Inward FDI Potential Index for Dalian and Shanghai, are:
GDP per capita: This variable shows the level of economic development of Dalian and Shanghai. It
captures the size and the demand for goods and services. It also shows good living conditions, the
availability of developed institutions, and so on, all of which attract FDI. In addition, higher per capita
GDP often implies higher labor productivity and stronger innovative capabilities, all conducive to FDI.
On the other hand, it also indicates higher wages, which might adversely affect low-cost labor-seeking
FDI for Shanghai. On balance, however, low wages are not a major factor to induce FDI. GDP per
capita of Shanghai precede Dalian out and away in both 2000 and 2004. Shanghai with score of 1
indicates that Shanghai is the best developed economy in China. Dalian with the score about 0.7 is a
developed economy and an up-intermediate income city in China. Dalian has high integration economic
strength, is ranked as the sixth city out of top 100 Integration Economic Strength City in 2005.
Moreover, Dalian has been selected to be the best suitable city to live in China. Dalian as a innovative
city with higher labor productivity and good living conditions, of course is going to attract more FDI. So
this is an important factor for Dalian and Shanghai to compete in attracting FDI.
Real GDP growth (for the past 10 years): This variable is a predictor of the future size of a city market,
one of the main determinants of FDI. Higher growth rate can also mean rising productivity that could
induce other kinds of FDI. For the past years, this variable for Shanghai is 1, the highest city in China.
Dalian with 0.82 real GDP growth score has shown the difference between these two cities. Hence, for
the further development, Dalian market size is lower than Shanghai.
Exports as a percentage of GDP: This shows the degree of internationalization of a city, the
importance determination to induce FDI. In the present analysis, the export-GDP ratio is concluded as
an approximate indicator of the openness of the economic of one city and the competitive advantages
that serve to attract FDI. FDI and international trade have a clear causal relationship (WIR2002).
International business through trade generally lays the ground for inward as well as outward FDI. The
international production also serves to complement trade, such as some multinational company has
subsidiary in other nations. In turn, FDI can affect the export-GDP ratio positively. Thereby,
export-GDP ratio would have to be taken into account when assess the potential of FDI. The score for
Shanghai export-GDP ratio is increase from 0.59 in 2000 to 0.97 in 2004. Dalian keeps the relatively
same level of attendance international exposure with the average score of 0.41. Although Dalian has
relatively low degree of internationalization, the export construction in Dalian has been continuous to
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improve. At present, electromechanical products and hi-new technology products occupy the high
percentage of the exporting share. Dalian maximizes its relative competitive advantages and emphasizes
on micro-electronic, new materials, biology engineering, information communication and other hi-new
technology industry. At present, Shanghai has better competitive ability on this factor than Dalian.
Number of telephone lines per 1,000 inhabitants: this variable shows the development level of
telecommunications, as well as road and railway networks which are not included in the analysis, are
part of the basic physical infrastructure needed to conduct business. Because more and more MNEs seek
to coordinate production activity across countries, the availability and cost of a location infrastructure is
particularly important for FDI. Shanghai has the average score of about 0.9 is higher than Dalian. Which
means the general infrastructure condition in shanghai is better than Dalian. At present, Dalian Port is a
central port for the northeast area of China, has 1.5 million ton throughput till the end of 2004. The
container services reach to 69 cities in 2004 and the intensity of Ship Services is 328 times monthly.
Dalian had international airport in 1985, and in 2004, Dalian airport has been received accumulated
passengers 4614 thousand and goods 118 thousand ton. The airline services have covered the most
major cities in China, however, only established the network for Northeast Asia area. The railway and
highway condition in Dalian is ranked at the beginning in China.
Commercial energy use per capita: This is a representation for the availability and cost of energy,
which is a necessary input for the most production activities and can be expected to be a factor affecting
FDI, especially for an efficiency-seeking FDI. For this aspect, Shanghai with the highest score of 1 has
an obvious advantage than Dalian with the average score of 0.57.
R&D expenditures as a percentage of gross national income: This indicates the technological and
innovative capabilities of an economy, which are important factors to attract created-asset-seeking FDI
(WIR 2002). The products and the processes of created-asset-seeking FDI mostly are knowledge-based
and competition tends to be tension, as R&D activities are costly and risky. Hence, this factor is also a
driving force for international production. Dalian and Shanghai both have relatively low score on this
indicator which means no city has competitive advantage over other.
Students in tertiary education as a percentage of total population: This is a measure of the extent
of higher education and related skilled labors. An educated and skilled workforce is an important
condition for FDI in industries facing global and regional competition. Shanghai with the average score
of 0.76 has slightly advantage than Dalian with the score of 0.71. In 2004, there are 157 thousand
students in tertiary education in Dalian and Dalian has strengthened the talent development with the
annual growth rate of 5.6%. Petrol & chemical, facility manufacturing and electronic information are the
three major industries to gather the talents in Dalian.
In addition, country risk includes the political and commercial risks related to investing in a country.
This variable is an indicator of the degree of political, economic and social stability of a country. As this
paper aims to assess the potential of FDI on the city level in China, though there are different policy
regimes for FDI and the economic sensitivity for different cities, it can be believed that which can
neglect.
5. Conclusions
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Based on the study above, the conclusions can be drawn, as follows: 1 The overall scale of FDI inflows
in Dalian is lower than it in Shanghai from 1995 to 2004. For the past decade, the total amount of actual
used FDI in Shanghai is 54.52 billion dollar and the amount for Dalian is 18.08 billion dollar. Shanghai
is three time to Dalian. The investment projects items in shanghai with 33547 is 3.3 time to it in Dalian
which is 10294. 2 The origin of FDI in Dalian is very intensive. 74% of the total amount of FDI in
Dalian concentrates on three origins, namely China Hong Kong, Japan and Korea. The construction of
FDI origins differ between Dalian and Shanghai. The investment position of Japan and Korea for Dalian
is much important than it for Shanghai. 3 Wholly owned company is the most popular FDI entry mode
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for the multinational corporations. This is the trend of FDI entry strategy for both Dalian and Shanghai,
even for China in general, is going to continue in the future. 4 The second industry, particular
manufacturing industry is the main industry for Dalian FDI utilization. The share of FDI in the first and
the second industry is less than 1/3 respectively. In contrast to the trend of China, the third industry
absorbs the majority of the FDI in Shanghai. 5 There is no significant difference between Dalian and
Shanghai on the FDI performance index. They are both front-runner cities, but the performance of FDI
in Dalian is slightly higher than Shanghai, which implies Dalian is more successful in attracting FDI
than Shanghai.
6 There is no huge difference between Dalian and Shanghai on the FDI potential
index; however, Shanghai is slightly higher than Dalian. The each comprising component of FDI
potential index of Dalian is lower than it for Shanghai. It indicates that Dalian’s the development of
extrovert economy is behind Shanghai, the cost of commercial energy usage is lower than Shanghai as
well as the growth rate. Dalian is lack of investment for R&D and behind Shanghai in the quality and
the cost of human resource.
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References
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