Shangais Microelectronics Industry FDI - Free Essay Example

Sample details Pages: 26 Words: 7655 Downloads: 10 Date added: 2017/06/26 Category Economics Essay Type Analytical essay Level High school Did you like this example? Determinants of FDI in Shangai Microelectronics Industry This study was aimed at investigating the determinants of FDI into Shangais microelectronics industry. The study was carried out by analyzing market data such as GDP, GDP growth, per capita GDP and other important variable such as labour quality and agglomeration effects in relation to Shangai. In addition two case studies were used to study the determinants of FDI in the industry. Don’t waste time! Our writers will create an original "Shangais Microelectronics Industry: FDI" essay for you Create order Based on the data gathered concerning Shangai, we can conclude that the main determinants of FDI in Shangais microelectronics industry are GDP growth, agglomeration effects, Per Capita GDP and labour quality. However, no real conclusions could be drawn about the case studies because their websites concerning their operations in Shangai are demonstrated in Chinese and there was no information in the annual reports to provide evidence on why they are investing in China. 1. Introduction. According to Cassidy et al[1], the economic development and contemporary competitive advantage of the coastal region of China has been brought about by Geographical, historical, climatological, agricultural, and trade advantages inherent in the region. The 1949 revolution under the tutelage of Mao Zedong had an impact on almost every aspect of China as well as Chinas relations with foreign countries[2]. Domestic economic development focused attention on the interior provinces and following the fai lure of these policies to provide the expected economic development, the open door policy was initiated by Deng Xiao Ping in 1978[3]. The success of the East Asian and ethnically Chinese economies provided evidence that economic development could be achieved by using investment from abroad (Foreign direct investment FDI)[4]. The early reform period witnessed the creation of special economic zones (SEZs) to enable the attraction of foreign direct investment[5]. These zones were set up in South East Asia adjacent to Hong Kong, Macu and Taiwan to serve as laboratories for economic reform[6]. The open city policy was later created this policy permitted 14 coastal cities stretching from Dalian in the north to Zanjiang Southwest of Hong Kong to attract FDI. FDI has therefore been seen as a major contributor to the economic development of China[7]. Table 1 below presents the inward movement of foreign direct investment to China according to country of origin in billions of US dollars fo r the period 1983-2001. one can observe from the table that Hong Kong has been the major contributor of FDI to china during the period under study. It contributed a total of 183.34billion US dollars out of a total contribution of 400.91billion US dollars representing a percentage of 47.2% of the total contribution during that period. Other major contributors included the USA with 34.55billion US dollars representing a percentage of 8.6% then Japan with 32.10billion US dollars representing a total percentage of 8.0%. The least contributor was Germany with a total contribution of 7.14billion dollars representing a total percentage contribution of 1.8%. Other locations also made a remarkable contribution of 53.61billion dollars representing a percentage total contribution of 13.4%. Figures 1 and 2 below present bar charts which serve as diagrammatical representations of the information in table 1. While figure 1 shows the contribution per country in billions of US dollars, figure 2 pre sents the same information as percentage contributions per country during the period 1983-2001. Again it can be clearly seen from both Figures that Hong Kong has been the major contributor of FDI to China. Table 1: Realised Foreign Direct Investment (FDI and other investments) into China by country of origin 1983-2001 in US$ billions at current prices. FDI home country Value in US$ billions Per cent Hong Kong 189.34 47.2 USA 34.55 8.6 Japan 32.1 8.0 Taiwan 26.71 6.7 Singapore 19.14 4.8 Virgin Island 18.27 4.6 S. Korea 11.09 2.8 UK 8.96 2.2 Germany 7.14 1.8 Other Locations 53.61 13.4 Total 400.91 100.0 Source: Adapted from Cassidy et al[8]. Figure 1. Source: Plotted using the information in Table 1. Figure 2. Realised Foreign Direct Investment (FDI and other investments) into China by country of origin 1983-2001 in percentages- Source: Drawn using the information in Table 1. China remains the second largest host of foreign direct investment in the world since 1994 second only to the United States of America[9]. An American credit rating agency in 2002, predicted that Chinas annual FDI was to reach 100billion US dollars by 2005. Despite the growth in FDI in China, most of the studies on foreign direct investment have either centred around the determinants of foreign direct investment into China or the effects of foreign direct investment in China as a whole[10]. For example, Wang and Swain[11] studied the host country determinants of FDI into China and found a positive correlation between FDI and Chinas GDP, GDP growth, wages, and trade barriers but a negati ve correlation between FDI and interest rates and exchange rates for the period 1978-1992. Chen et al[12] studied the relationship between output production and FDI and find a positive correlation between FDI and growth in output. Others studies have tried to compare the amount of FDI to China as a host country and other countries. For example, according to study by Wei[13] using cross country data, China appears to have received little FDI as a host country compared to an average host country despite the large amounts of FDI it has received so far. Fan and Hu[14] studied the effects on indigenous RD efforts based on a World Bank survey for 998 Chinese firms from 1998 to 2000. Their empirical analysis provide two findings as follows: (i) a firms expenditure on research and development decreases with the amount of foreign direct investment it receives; (ii) sector-level foreign direct investment has a greater positive impact on the research and development effort for the firms with m ore foreign presence. From the foregoing we can identify a literature gap in the FDI studies in China in that none of the studies have focused on the determinants of FDI to a particular industry in China especially the Shangai Microelectronic industry. There is no evidence to show the industries and regions that receive the highest foreign direct investment as well as the determinants of foreign direct investment to that industry or region. This study therefore intends to contribute to existing literature by studying the determinants of FDI to Chinas Microelectronic Industry. Statistics of modern Chinas economic development show that every US $100 increase in GDP requires US$10 worth microelectronic products to support. Following with the economic development, this relationship become closer. Globally, 65% of GDP growth in developed countries is related with integrated circuits (IC). In 2000, the sales amount of the IC market had reached 200 billion US dollar already, and it i s expected that about 1000 billion US dollar worth IC products will be manufactured to support 6-8 thousand billion US dollar worth electronic appliances. Microelectronic industry will overtake automobile industry to become the largest industry in the world. In China, the microelectronic industry has been started to build since 1965, however, because of many factors, its development has kept a slow progress. Until the late 1970s, because of the economic reform microelectronic industry has reactivated again and has become one of the rapidest and competitive industries now. The huge amount of FDI inflow every year to microelectronic industry in China has enhanced the development speed as well. Nowadays, 21 billion pieces of IC product can be manufactured in China every year, and bring 54.5 billion US dollar income to China. Interestingly we found that nearly 50% of Chinas microelectronic enterprises are setup in Shanghai, so microelectronic industry in Shanghai has been used as an example to be researched in this dissertation. In the dissertation, we are going to find how FDI inflow influences Shanghais microelectronic industry, and what are the determinants of those FDI inflows. Project Aims and research objectives Research questions What are the determinants of FDI inflow affecting Shanghais microelectronic industry? Research objectives To main objective of this study is to investigate the determinants of Foreign Direct Investment to Shangai Chinas Microelectrc Industries. Minor objectives include: To review the theories of FDI inflows Identify potential risks of FDI inflows to Chinas microelectronic industry Provide recommendation and strategies for encouragement to invest Finally find out what are the determinants of manufacturing industries affecting Chinas FDI inflow 2. Literature Review and Theoretical Framework. 2.1 Overview of Foreign Direct Investment Sun et al[15] defines FDI as a form of international inter-firm cooperation that involves a significant equity stake in or effective management control host country enterprise. In China, FDI also includes foreign investments in non-equity investments such as contracted joint ventures, compensation trade, and joint exploitation. Foreign Direct Investment (FDI) takes place when multinational enterprises (MNEs) attempt to exploit their oligopolistic advantages over domestic firms by internalising transactions within the firm which offers an advantage over external market transactions because of savings in transaction costs or because they can achieve better value appropriation or by avoiding uncertainty in the external pricing of information-intensive products[16]. In an effort to attract foreign direct investments (FDI), governments usually offer incentives such as trade policy conce ssions, financial assistance and tax breaks. It is generally believed that foreign direct investment can lead to job creation, increase in exports and thus increase in trade surpluses, increase in wage rates. As Davies and Ellies[17] puts it tax subsidies are directly contingent on the multinational enterprise (MNE) satisfying various performance indicators (PRs). Multinational enterprises may be allowed tax credits on the condition that they create at least 50 new jobs per year, that they export at least 70% of their output and that they maintain environmental protection and many others. Double taxation treaties to avoid double taxation of multinational firms profits have also been created between countries so as to encourage international movement of goods and capital. Fan and Hu[18] assert that third world countries tend to remain poor because they lack access to modern technology. To this effect these countries are often advised to bridge their technological gap with the firs t world countries by attracting foreign direct investment, which results in technological spillover and technological transfers to their domestic firms and ultimately improve their productivity[19]. Despite the positive aspects of FDI some economists and policy-makers share an opposing view on the technological advantages from FDI because technological transfers through FDI tend to substitute domestic technologies in production. In addition, a firms investment in research and development while improving its own technology at the same time enhances a countrys technological infrastructure and benefits its economy in both the short and long terms. An economy may therefore depend on technological transfers when it is relatively poor but must be able to depend on its own technology when it has achieved a certain amount of technological transfer and development[20]. Furthermore, developed countries that supply foreign technology to developing countries tend to exert a political leve rage on the poor countries making it difficult for them to have autonomy over their economic policies[21]. 2.2. Determinants of Foreign Direct Investment Theoretical determinants of foreign direct investment have been identified by prior studies. Ma and Delios[22] and Sun et al[23] identified a number of factors as the major determinants of the location choice of Foreign Direct Investment. Ma and Delios group them under three theoretical foundations including: economic agglomeration, traditional location advantages of the Ownership Location Internalisation (OLI) paradigm, and the institutional environment. The traditional location advantages of the OLI paradigm include factor endowments (land, labour, entrepreneurship and capital), market attractiveness, labour costs, and physical infrastructure[24]. Sun et al identifies agglomeration, labour quality, labour cost, level of scientific research, degree of openness and political risk. Economic agglomeration refers to the con centration and co-location of economic activities resulting to economies of scale and positive externalities[25]. Theoretically, the higher the level of agglomeration in a particular location, the greater will be the amount of inward foreign direct investment to that location. Conversely, the lower the level of agglomeration that is the lower the level of economies of scale and positive externalities, the less appealing will the location be to inward foreign direct investment[26]. Sun et al utilised the infrastructure quality, the degree of industrialisation and cumulative foreign investment as a proxy to agglomeration benefits. The quality of infrastructure was measured using the GDP per square kilometre. Since infrastructure includes the transport network, the higher the railway mileage per square kilometre, the higher the FDI[27]. Also, the higher the degree of investment per square kilometre, the higher the degree of industrialisation[28]. Labour Quality has always been and w ill remain an important determinant of FDI location choice. Sun et al measured labour quality using the number of research scientists, engineers and technicians per 1000 of employees. The higher the ratio in a particular location, the stronger, the locations ability to attract foreign direct investment[29]. For example, FDI in China from some countries to China correlates positively with regional labour quality[30]. According to a study by Fung et al[31] in a studying examining and comparing Foreign Direct Investment from the United States, Japan and the rest of the world over the period 1991-1997 provide evidence that FDI from two countries is exhibits a significant correlation with labour quality, as measured by the ratio of the number of students enrolled in higher education in a province to its total population. Comparing FDI from the USA to that from Hong Kong Fung et al[32] find that the correlation between FDI and labour quality is larger for the USA than for Hong Kong. In an other study by Gao[33] using data on FDI in Chinas provinces by source country over the period 1996-1999, he provides evidence that more detailed data do reveal a statistically significant positive relationship between labour quality and FDI location choice. Dividing the source economies into two groups: developing and developed, Gao provides evidence that FDI from the developed group is more sensitive to labour quality than FDI from the developing group[34]. Labour cost is also an important factor to consider when deciding on the location choice. Sun et al assert that although most people would think that lower cost of labour would mean higher ability to attract foreign investment, they provide evidence that that is not the case in practice[35]. This is because multinational firms tend to pay premiums over the domestic wage rate because they want to attract the highest quality of labour. Therefore wages in locations that attract more foreign direct investment tend to be higher t han in location where less foreign direct investment is attracted[36]. Higher wages are therefore regarded as a reflection of higher quality of labour. The level of scientific research is an indication of the level of general development. Sun et al used the amount of research and development expenditure as well as the number of patents as measures of the level of scientific research[37]. Accordingly, the higher the amount of research and development and the number of patents, the higher the level of scientific research. Sun et al also state that this variable is positively correlated with inward foreign direct investment, that is, the higher the level of research and development and the higher the number of patents in a particular location, the higher will be the amount of foreign direct investment to that location[38]. Education has also been considered as a measure of the level of scientific research. It is measured by the percentage of the population that has received the seco ndary or above education[39]. The higher the level of education, the higher the amount of inward foreign direct investment and vice versa. The degree of openness of an economy is another important factor in determining inward foreign direct investment. However, there is a controversy as to how the degree of openness may affect foreign direct investment[40]. On the one hand, the higher the degree of openness, the higher would be the amount of inward foreign direct investment since the economy welcomes foreign capital as well as foreign investors who easily familiarise themselves with the host country or location[41]. On the other hand, the degree of openness of an economy may also lead to less inward foreign direct investment given that most investors would perceive potential high competition in the host country[42]. There is therefore a question mark on how the degree of openness of an economy actually affects its attraction of foreign direct investment. Sun et al however used th e ratio of total import over GDP of a province as a proxy for the degree of openness of the province[43]. Another important determinant of FDI is the political risk of a location. The higher the political risk, the lower will be the locations ability to attract FDI. On the other hand, the lower the perception of political risk, the higher will be the locations ability to attract foreign direct investment. Sun et al constructed the variable for political risk using the those provided by Political Risk Services[44]. FDI substitutes are also important variables that determine a locations ability to attract FDI. For example, if a particular location is capable of raising finance from different sources, it will not be necessary for such a province to attract FDI. Consequently, the higher the amount of FDI substitutes, the higher, lower would be the amount of FDI and vice versa. Sun et al considered foreign equity capital as a proxy for measuring FDI substitutes. They considered spe cifically the number of firms in each province that have B-Share, H-Share, and/or N-share issues since such shares are issued in order to raise foreign equity capital. Other commonly used variables include number of tourists, number of telephone sets, promotion expenditure for attracting FDI, tax structure, and the special treatment offered to foreign investors that may also have an impact[45]. Exchange rates have also been identified by Zing[46] as important determinants of the flow of FDI. Depreciation in the value of the host countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s currency usually leads to an increase in the flow of foreign direct investment to that country. On the other hand an appreciation in the host countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s currency leads to a reduction in FDI to the host country[47]. Exchange rate affect FDI in two through two main channels: the wealth effect channel and the relative production cost channel. A depreciation in the host countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s currency leads to a reduction in local production cost in terms of the foreign currency thereby resulting to an increase in profit of export-oriented foreign investors[48]. These higher returns resulting from export sales lead to an increase in the amount of FDI[49]. Under the wealth effect channel, a depreciation of the host countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s currency leads to an increase in the wealth of the foreign investors as opposed to that of the domestic investors. Consequently, it becomes easier for foreign investors to acquire more domestic assets that domestic investors can do[50]. This is so because, having capital measured in foreign currency, all factor inputs such as land, labour, machines and assets in the host country become cheaper to the foreign investors after the devaluation and therefore encourages them to purchase more of the domestic inputs[51]. Under the relative production cost channel, a devaluation of the host countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s currency results into relatively lower costs o f production. This is so because the devaluation leads to lower costs of locally purchased inputs[52]. The relative production channel if of particular importance to the export-oriented FDI since the segmentation between production location and product market can prevent sales prices from being affected by the devaluation[53]. For example, prior to 1995, the Chinese has witnessed a constant devaluation against the US dollar and many other major currencies[54]. This is expected to have played a major role in attracting foreign direct investment to China. As shown in table 2 below, the Chinese Yuan witnessed a fall in value from 3.72Yuan/US Dollar in November 1989 to 8.72 Yuan/Dollar in January 1994 reflecting a devaluation of about 60%. The value increased slightly from 8.72Yuan/US dollar in January 1994 to 8.44Yuan/US dollar in April 1995. Similarly the value of the Chinese Yuan witnessed a drop in value from 38.5Yen/Yuan in November 1989 to 9.91 Yen/Yuan in April 1995. Despite t he 7.5% appreciation of the Chinese Yuan against the US dollar in April 1995, the Yuan witnessed a further depreciation against the Yen as a result of the Yenà ¢Ã¢â€š ¬Ã¢â€ž ¢s appreciation against the US dollar[55]. Table 2. The Yuanà ¢Ã¢â€š ¬Ã¢â€ž ¢s devaluation against the Dollar and the Yen: November 1989 to April 1995 Official exchange rate (Yuan/US dollar) Depreciation against the dollar (%) Official exchange rate (Yen/Yuan) Depreciation against the Yen (%) November 1989 3.72 38.5 December 1989 4.72 21.2 30.44 21.1 November 1990 5.22 9.6 24.75 18.7 March 1993 5.73 8.9 20.36 17.7 January 1994 8.72 34.1 12.77 37.3 April 1995 8.44 -7.5 9.91 22.4 Source: Adapted from Zing[56] Although it is not certain as to whether the exchange rate policy was intended to promote foreign direct investment, it actually did increase Chinaà ¢Ã¢â€š ¬Ã¢â€ž ¢s ability to attract foreign direct investment by strengthening its competitiveness as a production base for export-oriented multinational companies[57]. The foregoing implies that investors must take into consideration economic, geographic and institutional factors when making an FDI location choice[58]. According to Ma and Dollies, the institutional factor has become an important determinant of FDI location in emerging economies[59]. They define an emerging economy as a low-income, rapid growth country that uses economic liberalisation as its primary engine of growth[60]. Examples of emerging economies include those of Eastern Europe (e.g, Czech Republic, Hungary, Portland, Russia, and Turkey), those in a Asia (e.g., China, India, Indonesia, and Vietnam) and those of Latin America ( e.g., Argentina, Brazil, Chile, Mexico and Peru)[61]. Within the emerging economies are the transition economies, which include China, the former Soviet Union and Vietnam[62]. Transition economies are described as a subset of the emerging economies that have been experiencing considerable and consistent economic growth. Despite increase presence of multinational companies in transition economies, these multinational enterprises tend to suffer from location-based disadvantages and institutional pressures. These disadvantages arise from a basic characteristic of the institutional environment in a transition economy. That is, the institutions in a transition economy tend to be under development, and do not directly parallel those in the developed economies in terms of their functioning. As a result, there is a widespread of institutions that cannot ensure a well functioning of markets in transition economies making multinational companies to adapt to the challenges posed by local forma l and informal institutions. There are also considerable differences on the functioning of the institutions in the different provinces of a particular country. This also makes it important for the multinational company to consider the best province or region within a country when deciding on an FDI location decision. 2.4 Entry Modes Used By Multinational Firms (1000 words) The most common entry modes available utilised by a multinational firm includes wholly owned subsidiaries and equity joint ventures[63]. Other entry modes include contractual joint ventures (CJVs) and joint stock companies (JSCs)[64]. Wholly owned subsidiaries are subsidiaries where the parent company owns all (that is, 100%) of the shares of the subsidiary company, implying that there is no minority interest[65]. Multinational firms often utilised the wholly owned subsidiary approach as a result of the weaknesses to exporting which is the inability of the multinational company to realise the sales potent ial of a product in a foreign country[66]. Therefore by manufacturing the products abroad, the multinational company can easily monitor market developments, adapt its products and production schedules to changing local tastes and conditions, fill orders faster, and provide more comprehensive warrantees or after-sales service[67]. Many multinational companies also benefit from wholly owned subsidiaries in that it is possible for them to set up research and development (RD) facilities along with their foreign operations enabling the multinational firm to keep track of local competition and design of new products[68]. By setting up wholly owned subsidiaries the multinational firm demonstrates its commitment to the local market enabling the multinational company to generate more sales and thus profits as well as increase its supply stability[69]. From the foregoing we can see that the main modes of entry by Multinational firms to China include wholly owned equity (WOEs), Equity Joint Ventures (EJVs), contractual joint ventures (CJVs) and joint stock companies (JSCs). 2.5 Overview of FDI in China FDI in China has witnessed three stages[70]. The first stage began in 1979 following the enactment of the Law of the Peopleà ¢Ã¢â€š ¬Ã¢â€ž ¢s Republic of China on Joint Ventures Using Chinese and Foreign Investment_ which saw the creation of a state foreign investment commission to oversee the investment process[71]. During this first stage four special economic zones (SEZs) were created at Shenzen, Zhuhai, Ziamen and Shantou in the early 1980s[72]. In 1984 14 more coastal zones were created while in early 1985 three more zones where opened at Yangtze River Delta, the Pearl River Delta, and the Zhanghou-Quanzhou-Xiamen region[73]. the second stage began with the institution of the PRC Law on Foreign Enterprises, which formally granted legal right to wholly owned enterprises in China[74]. In October 1986, the à ¢Ã¢â€š ¬Ã…“Provision for the Encouragement of F oreign Investments were issued by the State Counsel permitting more freedom of independent operations for FIEs and granting more tax incentives for foreign investments[75]. The second stage witnessed a tremendous growth rate in FDI during 1979 to 1988 as a total of US$12.05 billion actual FDI was received during the period. However, following the Tianman Square incidence, the growth rate in FDI was slowed down[76]. The third stage began with the Amendments to the Joint Venture Law which was issued by the State in April 1990 in response to the Tianman Square incidence. In 1991, the Income Tax Law for Enterprises with Foreign operations was issued and FDI resumed growth in 1991[77]. 2.6. Review of Relevant FDI Literature in China The most relevant literature pertaining to foreign direct investment in China has been centred around the impact of foreign direct investment on Chinese economic development or economic growth. Other studies have centred around a particular countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s location choice of foreign direct investment while a few studies have tried to focus on the determinants of foreign direct investment in china. As earlier mentioned in the introduction, none of the studies have tried to analyse the determinants of foreign direct investment to a particular industry let alone the Micro electric industry. In order to better see the existing identify the literature gap, this section will try to review previous literature on previous FDI studies in China. As earlier mentioned most studies have centred on the impact of foreign direct investment in China. For example, Giner and Giner[78] studied how the variations in both economic and socio-political variable influence the flow of foreign direct investment to China. Based on an interpretative model incorporating both economic and socio-political variables covering the period between 1979 and 2003, they provide conclusive evidence that on an internal level Increase political stability and improve the conditions in which companies must operate, without ignoring the program of improvement of the basic economic characteristics such as the GDP, the GDP per capita, the growth of GDP, especially since these are the factors that will contribute to consolidating FDI while on an external level intensification of all policies promoting economic openness, from commercial policies to those regulating foreign direct investment will lead to an increase in the flow of inward FDI. According to Ma and Delios[79] the effects of the institutional environments to the context of the subnational location choice decision in a transition economy. The study considered specifically the timing of entry and entry mode, industry choice and survival aspects of decisions about Japanese FDIs in Chinaà ¢Ã¢â€š ¬Ã¢â€ž ¢s two major cities Shangai and Beijing. Using a sample of 1610 Japanese subsidiaries established during the period 1979 to 2003 their results show that Japanese investors had a tendenc y to avoid policy uncertainty and political harzards by investing in and economic-oriented city- Shangai than a politically-oriented city Beijing. They also provide evidence that subsidiaries in Shangai were more likely to survive than those in Beijing. Wei and Liu[80] investigated why multinational firms prefer a particular entry mode to another as a means of foreign direct investments in China. Basing their ideas on previous studies two main entry approaches were identified including wholly owned enterprises (WOEs) and equity joint ventures (EJVs). In addition two other entry modes common in China Contractual Joint Ventures (CJVs) and Joint Stock Companies (JSCs) were also identified making a total of four. To meet their objective five hypotheses were developed based on transaction cost economies and tested using a data set of 10,607 foreign investments in China. The results show that Foreign investors tend to prefer WOE mode given that ità ¢Ã¢â€š ¬Ã¢â€ž ¢s large investment commi tment, a high level of the host countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s experience in attracting FDI, a good specific industrial location and a high asset intensity in the host industry. On the other hand if the above conditions are not met MNEs tend to prefer the EJV and JSC. There is also evidence that good specific location favours the CJV[81]. Compared with overseas Chinese investors from Hong Kong, Macao, and Taiwan, foreign investors from different countries prefer EJVs to WOEs and CJVs[82]. Fa and Hu[83] studied the relationship between indigenous technological efforts and FDI. Using World Bank firm level data, they find a negative relationship between indigenous technological efforts and FDI. Particularly, they find that a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s expenditure on research and development reduces with the amount of FDI it receives. They also find a positive impact of FDI on the productivity growth of Chinese firms[84]. Xu et al[85] investigated the chaotic system of FDI in China. Using a nu merical simulation approach their results show that the FDI chaos in China can be controlled by the intervention of the State. However, they also warn that the intervention needs to be only minimal lest the control process would have no economic significance[86]. Tuan and Ng[87] studied the impact of agglomeration on FDI inflows in the context of the Kruganà ¢Ã¢â€š ¬Ã¢â€ž ¢s CP relation (1991) by investigating (1) the formation of a CP relation via gravity model analysis; (2) whether different types of industry FDI flows respond differently to the CP system, given agglomeration effects; and (3) whether FDI origin and firm scale matter in affecting FDI flows. Using a database of a population frame of 37,742 firm-level manufacturing and service joint ventures investing in Guandong in 1998, their empirical results show that the agglomeration of the CP relation have affected FDI flow patterns. Although different responses to the CP system were observed for both manufacturing and servic e joint ventures, smaller firms were found to be more responsive to the CP-agglomeration settings irrespective of FDI by industry type or sector[88]. Chadee et al[89] investigated the location choice of MNEs in China. Using a sample of 6430 equity joint ventures in China during 1984 to 1996 they find that the duration of the EJV agreement, the origin of the foreign investor, and the type of business activity are related to the location of the equity joint ventureà ¢Ã¢â€š ¬Ã¢â€ž ¢s business activities within China[90]. They also observe significant differences between location choices of equity joint ventures operating in the manufacturing and services sector[91]. In addition MNEs also tend to locate their activities in Chinaà ¢Ã¢â€š ¬Ã¢â€ž ¢s metropolitan cities such as Shangai and Beijing[92]. According to Chadee et al, these findings reflect the dynamic nature of government policy toward FDI in China and their impact on the location choices of MNEs[93]. 3. Research methods. The research will adopt a case study approach. Robson (1993: 40) as quoted by Saunders et al[94], defines a case study as the à ¢Ã¢â€š ¬Ã‹Å"development of a detailed, intensive knowledge about a single case, or a small number of related cases. This strategy is important when the researcher needs to gain a rich understanding of the context of the research as well as the process being enacted. In addition, the case study approach has the ability to generate answers to the question why? as well as what? and how? questions[95]. The limitation with the case study approach is that a researcher may regard it as an unscientific approach since research based on a case study may be difficult to generalise[96]. However, Saunders et al[97] argue that the case study approach can be a very worthwhile way of exploring existing theory. They further argue that a well-constructed case study can enable the researcher to challenge an existing paradigm and also provide a source of a new hypothesis [98]. The case study approach provides a systematic way of looking at events, collecting data, analyzing information, and reporting the results. As a result the researcher may gain a sharpened understanding of why the instance happened as it did, and what might become important to look at more extensively in future research. Case studies lend themselves to both generating and testing hypotheses[99]. Exploratory and narrative case studies will be used in the analysis of this study. An exploratory case study can condense the case study process since it can be undertaken before implementing a large-scale investigation. Exploratory case studies can help in the identification of questions, select measurement constructs and develop measures of uncertainty. In the research in question, there is uncertainty about the determinants of FDI inflow to Chinaà ¢Ã¢â€š ¬Ã¢â€ž ¢s manufacturing industries. Large scale investigations including facts, statistics and empirical findings will be im plemented. Measures of identifying the determinants of FDI inflow will then be suggested with the goal of finding answers. Findings will then be presented in a narrative format. The Microelectronic industry in Shangai is going to be used as the case study in this research. This is because, it represents one of the largest manufacturing industries believed to have received the highest amount of FDI inflows to China. It is therefore easier to collect sample data on this industry to enable this research attain its objective of understanding the determinants of FDI into this industry. Data concerning FDI into Shangai as well as the GDP of the city will be analysed to draw relevant conclusions. 4. The Shangai Province and Microelectronics Industry 4.1 Basic Facts about Shangai Shangai has a population of 17.5million inhabitants, which represents 1% of the total population of China. Its current Per capita GPA is $6,200, GDP growth is 11.1% and its total GDP is $109billion repr esenting 5% of Chinaà ¢Ã¢â€š ¬Ã¢â€ž ¢s GDP. Its national GDP growth is 9.9%. Shangai accounts for 13% of Chinaà ¢Ã¢â€š ¬Ã¢â€ž ¢s total imports and 10% of Chinaà ¢Ã¢â€š ¬Ã¢â€ž ¢s contracted Foreign Direct Investment[100]. CS Shanghai covers the Consular District of Jiangsu, Anhui and Zhejiang provinces and the City of Shanghai. It is the industrial, financial, and commercial center of China. It hosts a concentration of manufacturing activity in such key industries as automotive, electronics, telecommunications, machinery, textiles, iron and steel, and petrochemicals[101]. In 2005, exports from Shanghai to other parts of the world were US$ 90.7 billion, an increase of 23% over 2004, and constituting about 16% of Chinas total. About 25 percent of Chinas total exports pass through Shanghais ports. Two-way trade between Shanghai and the U.S. was more than US$ 31 billion in 2005, a 19% increase over 2004[102]. Shangaià ¢Ã¢â€š ¬Ã¢â€ž ¢s contracted FDI in 2005 was US$ 14 billion, and actual realized investment was US$ 6.9 billion. The U.S. is one of the top investors in Shanghai with a share of Shanghaià ¢Ã¢â€š ¬Ã¢â€ž ¢s cumulative FDI, at approximately. US$ 9.5 billion which is roughly 10% of Shanghais total[103]. The American Chamber of Commerce is the largest in the province with over 3,000 members and about 80 new members per month and there are about 4,700 U.S.-invested projects in Shanghai[104]. The Shangai province receives preferential treatment from the government as an incubator for reforms and pilot projects. Despite the relative high cost in Shangai compared with other provinces the business environment is generally more transparent[105]. Sectors to watch in the region are IT, telecommunications services, transportation infrastructure (ports, metro and light rail), distribution services, environmental technologies, construction materials, architectural and engineering services, industrial equipment, machine tools and manufacturing process con trols[106]. Economic Growth Its economy continues to grow. It relies on the advancement of science, education and technology as the strategy for revitalizing the city and enhancing its comprehensive competitiveness. Its doors remain wide open to the foreign word and reforms in its technological and government systems have taken a faster rate. From the foregoing, the city has been successful in keeping its economy on a track of constant fast and healthy growth since 1982. it has maintained a double digit GDP growth rate in 14 consecutive years[107].ÃÆ' £Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬ Financial Income In addition to maintaining a rapid economic growth, Shangai has also achieved a big increase in its financial income. In 2005, the city realized a total financial income of 409.58 billion yuan, 1.3 times more than in 2000, representing an annual growth of 18.5% on average. The cityà ¢Ã¢â€š ¬Ã¢â€ž ¢s local financial revenue increased to 143.39 billion yuan, 20.7% higher th an the previous year[108]. Of the total, the value-added taxes stood at 22.612 billion yuan, up 13.4%; business operation taxes 51.293 billion yuan, up 15.9%; personal income taxes 11.192 billion yuan, up 26.2%; and property taxes 3.41 billion yuan, up 25.9%. During the 10th Five-year Plan (2001-05), the cityà ¢Ã¢â€š ¬Ã¢â€ž ¢s local financial revenue total 479.2942 billion yuan, representing an annual growth of 23.6% on average[109]. Proportions in the Nations Total It plays an important role in the Chinas social and economic development as the international metropolis-oriented city is striving to serve the nation and leading the growth of the Yangtze River Delta region.[110] With a population of only 1% and a land area of 0.06% of the nations total, Shanghai contributes one-eighth of the nations total financial income. The commodities passing through the citys ports account for 25% of the nations total and the figure with its volume of cargo handling at local ports is 10%[11 1]. The city has further optimized its industrial structure, thus constantly improving the foundation for its economic growth[112]. In 2005, the realized added value in the citys secondary industry reached 447.592 billion yuan, up 87.8% over 2000, or an annual increase of 13.4% on average, according to the comparable prices. The realized added value in the tertiary industry totaled 458.838 billion yuan, up 66.7% over 2000, or an annual increase of 10.8% on average. The ratio of the citys primary industry, secondary industry and tertiary industry had changed from 1.8:47.6:50.6 in 2000 to 0.9:48.9:50.2 in 2005.[113] Employment Structure ÃÆ' £Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬ÃƒÆ' £Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Following the reforms of the economic structure and industrial distribution there has been marked changes to the cityà ¢Ã¢â€š ¬Ã¢â€ž ¢s employment structure[114]. One of the changes is that an increasing number of people have been employed in the service sector. In 20 05, the ratio of employees in the primary, secondary and tertiary industries stood at 7.1:37.5:55.4, compared with 10.8:44.3:44.9 in 2000. The proportion of the employees in the service sector rose by 10.5 percent whiles those for the primary and secondary industries dropped by 3.7 and 6.8 percent respectively[115]. Investment Structure The citys investments in fixed assets continue to rise as part of its objective to improve on infrastructural development. For example, in 2005, the city invested 354.255 billion yuan in fixed assets, up 14.8% from the previous year[116]. Of this amount, 124.686 billion yuan went to the property development, rising 6.1% year-on-year and accounting for 35.2% of the total investment[117]. The investment structure saw new changes in the past year. One change was in the type of industrial sectors the funds went. Investment in the tertiary sector totaled 245.487 billion yuan, up 18.6% year on year, compared with a 7.3% increase in the investment int o the secondary industry[118]. The changes were also discovered in the type of economic sectors that received the fund. The non-state-owned businesses got an injection of 230.228 billion yuan, up 8.1%; the state-owned businesses got 124.027 billion yuan, up 29.9%. The proportion of private investment also increased[119]. In 2005, fixed asset investment made by the non-state sector reached 94.215 billion yuan, accounting for 26.6% of the citys total and rising by 3.4 percentage points. Ownership Structure ÃÆ' £Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬ÃƒÆ' £Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬There has rapid growth in non-public ownership, helping to build an ownership structure where the state, foreign and non-public funds teams up to drive forward the economic growth. In 2005, the proportion of the state-owned sector in the citys GDP dropped from 59.6% in 2004 to 57.5%, while the figure of the non-public economic sector rose from 40.4% in 2004 to 42.5%[120]. In the non-public sector, the pr oportion of the private ownership in the cityà ¢Ã¢â€š ¬Ã¢â€ž ¢s GDP rose to 16.4% from 15.7% in the previous year[121]. Shangai is one of the four coastal zones that were created in 1978 to attract foreign direct investment in China. Since then, China has attracted a tremendous amount of foreign direct investment with a substantial amount of investment directed to Shangai. The major industries that have been attracting this investment include industries such as automobile, microelectronics, IT, and other manufacturing industries. Major companies investing in Shangai are from Hong Kong, Japan, USA, Taiwan, and other major third world countries such as Germany, Italy and Canada. 4.2 Shangai Microelectronic Industry Shangai has become one of the most attractive places of the integrated circuit (IC) industry development remains one of the most appealing investment environments for the firms operating in the microelectronics industry[122]. The industry is expanding to cover thr ee areas including Pudong, Caohejing and Puxi (Songjiang and Qingpu), and at present has shaped the microelectronics industry base basically characterized by one belt two zones across Shanghai from east to west[123]. The Shangai IC industry has achieved a long lasting solution in the IC industry over the last two years; it consists of an IC chain, covering design, assembly, and test etc. Upstream and downstream related industries with reasonable structure and clear work division have emerged[124]. Following the implementation of the projects of Huahong NEC, SMIC, GraceSMC, AdvancedSMC, TaiwanSMC, Hanson Co., Xuqing Semicon as marks, the production line of 8 inches integrated circuits will have 11 , and 4-6 inches production lines will have six; in addition, there are Huahong Design, VIA Technologies, SJTU-Han Chip, Fudan Micro-electronics etc, a lot of design enterprises; a number of professional assembly and test enterprises such as Intel, Amkor Technology, ASE Kaohsiung, ChipPA C, GAP tech have already registered in Shanghai[125]. The Shanghai Pudong microelectronics industry belt, with Zhangjiang Information City as a core and Shengjiang road as an axis, extends to the Jinqiao Export Processing Zone and Waigaoqiao Free Trade Zone and radiates toward the surrounding industry parks. The base core area from north to south is constituted with total planned area of 20.5 square km[126]. According to the statistics, the increase of sales income of the integrated circuit in the microelectronics industry belt is over 100%. 5 production lines of 8 inches integrated circuits have been put into operation with annual output of 8 chip of 600,000 pieces and its production value is up to 7 billion Yuan[127]. The Caohejing Hi-tech Park has become an ideal base for the IC industry and the sales income of its micro electronic industry exceeded 8 billion Yuan in 2003, representing a 40% increase compared with 2002. At present, the Caohejing Hi-tech Park accommodates mo re than 70 IC business enterprises, with 7,000 employees and is currently one of the biggest domestic bases of IC chips in RD and manufacturing[128]. The Songjiang Industry Zone lays emphasis in its new western region on enterprises, whose business is assembly of the integrated circuit, with planned area 18 square kilometers. Taiwan SMC, the world leader in chip manufacture, has signed an investment agreement with the Songjiang Government and located in the new western region. Its initial project of 898 million USD investment was expected to put into use as from September 2004[129]. The Taiwan business industry park under construction in the Qingpu District is a core area of its microelectronics industry, with planned area of 9.9 square kilometers. A number of businesses have been digging here such as Hongmao microelectronics with total investment 3.6 billion USD, Hanson technology with 3 billion USD and Xuqing semiconductors 5 billion USD etc. have registered[130]. The mai n objective of the Shangai microelectronics industry is to improve Research and development (RD), increasw categories, speed up upgrade and raise profit.[131] The industry is also interested in promoting interaction and development of the IC design and whole-set to promote combination of IT and other manufacture industries, to encourage electronic IT extension towards automobile electronics, digital TV and key media content industries. Another important objective is to construct complete industrial chains with the ability to research and develop, design, produce, assemble, test and produce software[132]. The industry is also gearing toward becoming a state-level microelectronic industry base with international level. it was estimated that the electronic IT projects under construction and to be built in the last 3 years would be about 20% of total industrial investment and total industrial value output is expected to reach 790 billion Yuan RMB by the year 2010[133]. 4.3 Descriptio n of Case Studies. As earlier mentioned in the research methods section, this study was aimed to be carried out by using two case studies. In line with the research methodology, this section presents a description of the case studies that have been selected for the analysis. They include STATS ChipPAC Ltd and Intel. 4.2.1 STATS ChipPAC Ltd. STATS ChipPAC Ltd. Is listed with the NASDAQ stock exchange. It is the leading provider of semiconductor packaging design, assembly, test and distribution solutions. STATS ChipPAC provides fully integrated, multi-site, end-to-end packaging and testing solutions that bring products to the market faster[134]. It remains a trusted partner and supplier to leading semiconductor companies worldwide[135]. Its customers include some of the largest wafer foundries, integrated device manufacturers (IDMs) and fabless companies in the United States, Europe and Asia. STATS ChipPAC is a leader in mixed signal testing and advanced packaging technolo gy for semiconductors used in diverse end market applications including communications, power, digital consumer and computing[136]. The company possesses advanced process technology capabilities and it has a global manufacturing presence covering Singapore, South Korea, China, Malaysia and Taiwan, STATS ChipPAC has a reputation for providing dependable, high quality test and packaging solutions[137]. The Companys customer support offices are centered in the United States (Californiaà ¢Ã¢â€š ¬Ã¢â€ž ¢s Silicon Valley, Arizona, Texas, Massachusetts, Colorado and North Carolina). Its offices outside the United States are located in South Korea, Singapore, China, Malaysia, Taiwan, Japan, the Netherlands and United Kingdom. STATS ChipPACs facilities include those of its subsidiary, Winstek Semiconductor Corporation, in Hsinchu District, Taiwan. These facilities offer new product introduction support, pre-production wafer sort, final test, packaging and other high volume preparatory se rvices[138]. Together with its research and development centers in South Korea, Singapore, Malaysia, China, Taiwan and the United States as well as test facilities in the United States, this forms a global network providing dedicated test engineering development and product engineering support for customers from design to volume production[139]. STATS ChipPAC offers two facilities in Shangai which include SCC Wafer Sort, Assembly, and Test Services and SCC-Songjiang) Gold Bumping and Wafer Sort Services. The first facility SCC Wafer Sort, Assembly, and Test Services is located in Shangaià ¢Ã¢â€š ¬Ã¢â€ž ¢s Xi Jiao Economics and Telecommunication Zones and it is a volume leader in high quality, cost effective wafer sort, assembly and test services[140]. The operation is housed in a 422,000 square foot building. It emphasizes low cost with consistent high quality yields, short cycle time and dependable on time delivery. A second 500,000 square foot facil.