This paper presents assesses of the contribution of inward FDI to China's recent rapid economic growth using a two stage growth accounting approach. Recent econometric literature focuses on testing whether Chinese growth depends on inward FDI rather than measuring the contribution. Foreign Invested Enterprises (FIEs), often (but not exclusively) are joint ventures between foreign companies and Chinese enterprises, and can be thought of as forming a distinctive subpart of the Chinese economy. These enterprises account for over 50% of China's exports and 60% of China's imports. Their share in Chinese GDP has been over 20% in the last two years, but they employ only 3% of the workforce, since their average labor productivity exceeds that of Non-FIEs by around 9:1. Their production is more heavily for export rather than the domestic market because FIEs provide access to both distribution systems abroad and product design for export markets. Our decomposition results indicate that China's FIEs may have contributed over 40% of China's economic growth in 2003 and 2004, and without this inward FDI, China's overall GDP growth rate could have been around 3.4 percentage points lower. We suggest that the sustainability of both China' export and overall economic growth may be questionable if inward FDI plateaus in the future.

This paper presents assesses of the contribution of inward FDI to China's recent rapid economic growth using a two stage growth accounting approach. Recent econometric literature focuses on testing whether Chinese growth depends on inward FDI rather than measuring the contribution. Foreign Invested Enterprises (FIEs), often (but not exclusively) are joint ventures between foreign companies and Chinese enterprises, and can be thought of as forming a distinctive subpart of the Chinese economy. These enterprises account for over 50% of China's exports and 60% of China's imports. Their share in Chinese GDP has been over 20% in the last two years, but they employ only 3% of the workforce, since their average labor productivity exceeds that of Non-FIEs by around 9:1. Their production is more heavily for export rather than the domestic market because FIEs provide access to both distribution systems abroad and product design for export markets. Our decomposition results indicate that China's FIEs may have contributed over 40% of China's economic growth in 2003 and 2004, and without this inward FDI, China's overall GDP growth rate could have been around 3.4 percentage points lower. We suggest that the sustainability of both China' export and overall economic growth may be questionable if inward FDI plateaus in the future.Since the mid 1980s Chinese GDP growth performance has averaged around 9.3 percent annually according to official data i . Although the reliability of these estimates has been questioned (see Rawski, 2001;Young, 1997 and, whether this growth performance is sustainable over the next several decades has been also actively debated both inside and outside China. In this paper, accepting these estimates as reliable, we assess the part played by inward (and heavily export platform based) FDI since the early 1990s using a two stage growth accounting decomposition approach. Our results suggest that the contribution of FDI to growth may have been large and that without inward FDI China's growth rate may have been around 3.4 percentage points lower in the last few years. A plateau or decline in inward FDI in the future could thus significantly lower growth performance in the next few years.Key to our analysis is to suggest thinking of China's economy today as comprising two distinct sub-economies. One involves Foreign Invested Enterprises (FIEs), often joint ventures between foreign companies supplying FDI, product design, and a sales network abroad and Chinese enterprises (predominately state-own enterprises, township and village enterprise) supplying land and labor. FIEs are heavily, but not exclusively, involved in manufacturing activities. The other is the non-FIE part of the economy in manufacturing, agriculture and services.These two parts are clearly interlinked to some degree, but they nonetheless stand in sharp contrast to each other. FIEs employ only a small part of the workforce (24 million out of a workforce of 752 million) and their labor productivity is around 9 times that in the non-FIE sub-economy. ...

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