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The Causes and Future of Taiwan and Hong Kong’s FDI in Mainland China

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Shortly after Mao Zedong’s death in 1976, the People Republic of China embarked on a gradual process of economic reform and liberalization. Under the initial leadership of Deng Xiaoping, China quickly began to receive foreign direct investment (FDI) from around the world. Initially Taiwan, Hong Kong, and ethnically Chinese overseas regions of Asia, such as Singapore and Malaysia, were the largest contributors of FDI to Mainland China. Despite these regions’ large contribution to investment in China, there is a common misconception that most of the investment in China has come from the “western” countries, such as the United States and members of the European Union (EU). This misconception is understandable because FDI from the US, European Union, and Japan accounts for 90% of outward FDI stocks and flows (UNCTAD, 2002). Despite the relatively small of the economies of Taiwan and Hong Kong compared with the US and EU, Taiwan and Hong Kong’s investment and involvement in the Chinese economy far exceeds that of “western” nations. In fact, Hong Kong and Taiwan together make up 58.08% of FDI to China, while the US, EU and Japan together only contribute about 25% of FDI to China (Zhang, 295). Additionally, nearly of all of Hong Kong and Taiwan’s FDI goes to China, with 90% and 77% going to China respectively (China Foreign Economic Statistical Yearbook).
The source of FDI in China, and Taiwan and Hong Kong’s affinity for investing in China may at first seem peculiar. This interesting trend can be explained through Hong Kong and Taiwan’s need for cheap labor, China’s emphasis on export production, and the cultural links between each region and China. Similarly, China has been interested in FDI from Taiwan and Hong Kong because ...

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