INTRODUCTION

In 1978, when the economic reform just started, China was a country without any foreign direct investment (FDI). Now, with almost 40 billion U.S. dollars of inflow in 1995 alone and $135 billion cumulatively since the start of the reform, it carries the distinction of being the largest developing-country host to direct international investment and the second largest host in the world.

Is China a black hole for international direct investment? Will it attract more investment at as rapid a rate as it has in the last five years? Many developing countries in Asia and elsewhere are concerned that FDI flows to China might displace investment going to their countries.

Contrary to the perception that China may have attracted too much FDI, a number of observations suggest that China may be an underachiever as a host to FDI. On the one hand, over 50 percent of FDI going to China, in terms of both annual flows and the cumulative stock, comes from overseas China, particularly from Hong Kong and Taiwan. On the other hand, over 80 percent of FDI originates from OECD countries, principally from the United States, Japan, Great Britain, France, and Germany. Thus China may not have attracted enough direct investment from these source countries relative to some international norm. Indeed, using data on FDI distribution in 1990, my earlier study (Wei, 1996) finds that, relative to gross national product and other economic and geographic characteristics, China is an underperformer as a host country for investment originated from the United States and major European source countries.