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Ms. Wanda S Tseng and Mr. Harm Zebregs

Distribution of FDI (in percent of total contracted value, 1998) Source: OECD, 2000 8. In terms of geographical distribution , the FDI pattern in China shows a great disparity among regions. The eastern region (accounting for 64 percent of GDP) took up nearly 88 percent of FDI to China while the central region (29 percent of GDP) took up 9 percent and the western region (23 percent of GDP) attracted only 2 percent ( Chart 3 ). This pattern stems from the FDI policies pursued by the Chinese authorities and reflects the incremental nature of the reform process in

Mr. Harm Zebregs and Ms. Wanda S Tseng
China's increasing openness to foreign direct investment (FDI) has contributed importantly to its exceptional growth performance. This paper examines China's experience with FDI and identifies some lessons for other countries. Most of the factors explaining China's success have also been important in attracting FDI to other countries: market size, labor costs, quality of infrastructure, and government policies. FDI has contributed to higher investment and productivity growth, and has created jobs and a dynamic export sector. China's success, however, did not come without some pitfalls: an increasingly complex tax incentive system and growing regional income disparities. Accession to the WTO should broaden China's "opening up" policies and continue FDI's contributions to China's economy in the future.
Ms. Wanda S Tseng, Nicholas Lardy, Yasheng Huang, Mr. Harm Zebregs, and Mr. Markus Rodlauer

finding in Brazil and Turkey. Does China’s success, then, hold lessons for other countries? Zebregs suggested the most important lesson is that China’s success is not unique. Its recipe was a standard one: large domestic markets, low wage costs, and improved infrastructure, complemented by open FDI policies and the establishment of open economic zones. Less common, but no less important, was China’s decision to pursue a gradual, persistent reform strategy that built on the success of market-based reforms in a few locations to develop, over time, broader interest in

International Monetary Fund. Research Dept.

form should such incentives take? In reality, many countries engage in some form of FDI policy. Preferred tools range from offering tax breaks to imposing requirements on foreign investors such as export targets and training of domestic workers. The evidence on the effects of taxes on FDI to date is unsettled. Using data on U.S. multinationals, Wheeler and Mody (1992) find that differences in corporate tax rates were not relevant for location decisions by foreign investors in the manufacturing sector, although they are more important for the export

Elizabeth Asiedu

attractive as other developing countries have become more attractive for FDI. Thus the ineffectiveness of policy reform and the deterioration in Africa’s global FDI position may be explained by the fact that sweeping reform in other developing countries and mediocre reform in Africa have made Africa less attractive for FDI. The following section describes how Sub-Saharan Africa’s infrastructure, institutions, and FDI policy have changed over time compared with other regions. Description of the Variables and Data According to the “eclectic” theory of FDI, countries