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Foreign Direct Investment in Chinese Textiles

Textile industry in China

Foreign direct investment (FDI) is an investment made by a company or individual based in one country in business interests in another country. FDI includes establishing business operations or acquiring assets in that second country. In 2005 the Chinese textile and garment industry received a total of $2.9 billion in FDI most of which came from Hong Kong, Macao, and Taiwan investors. Private firms in China seek foreign ownership, or FDI to mitigate challenges caused by the Chinese financial system. These challenges are in the form of capital allocations from the Chinese financial system that privilege the less efficient state owned firms at the expense of more efficient private firms. These financial constraints faced by private firms in China are driving up labor-intensive FDI. Labor intensive FDI includes markets with a work force behind it, such as the Chinese textile market. In order to secure FDI, private firms offer investors a stake in the company itself. Some estimates found that firms in the top 25 percentile of the financial constraint measure could have avoided losing 38.4% of their equity share to foreigners because they needed to obtain FDI. However, in a study that investigated the impact of FDI presence on the domestic and export sales of textile firms, researchers suggested that the presence of FDI generates positive and significant spillover effects on the domestic as well as export market sales of local firms in textile and manufacturing industries. Showing that government policies that restrict FDI and fail to improve the financial system can be counterproductive, but that policy-makers should encourage domestic and foreign-invested firms to increase the benefits of inward FDI. This suggests that FDI is important in alleviating the financial constraints of private firms.