Foreign Direct Investment in China's Service Industry: Effects and Determinants

Abstract

The degree of openness in the service industry has been greatly improved since China's opening up to the outside world in 1978. FDI in services has grown substantially and it can be expected that China's service industry will become the most attractive field to foreign capital. In this article, the status and problems of FDI in the service industry are analysed. Empirical analysis of the effects and determinants of FDI in services shows that a positive relationship between FDI in services and the development of China's services industry is not evident. The economic effect of FDI in services is dependent on the interaction mechanisms between FDI and the levels of human capital available, R&D capability and China's open-door policy. FDI in services is positively influenced by the degree of openness, market scale and cumulative FDI, while a high wage rate acts as a deterrent to inward FDI. The scale and quality of FDI in services should be improved by increasing domestic absorptive capability and opening the service sector further under the WTO framework.