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1. Background
Since the economic reform and opening policy in 1978, China has opened its door to the foreign direct investment (FDI) gradually. Especially, Chinese government has been pursuing a policy of encouraging foreign investment in the country since the passage of the joint venture law. Then the FDI grew from a modest amount of a few hundred million dollars annually in the late 1970s and early 1980s to almost only US$3.5 billion annually in the late 1980s.

In the first stage (prior to 1991), it is characterized by a slow increase in absolute amount of FDI. At the early stage, the Chinese opening-up policies were only limited to some special cities, such as special economic zones and opening coastal cities. Meanwhile, some difficulties of the international corporations in entering the Chinese market and the non-convertibility of the Chinese Yuan were possible barriers to the foreign investments.

The second stage (1992-1998) witnessed a substantial increase in foreign capital into China. The opening up center moved from Pearl River Delta to Yangtze River Delta. Figure 1 shows that annual inflow of FDI increased sharply after 1992. However, beginning with a 25.21 percent growth in 1992, China has since attracted greatly increased amounts of foreign direct investment. Dramatic increases of FDI inflows into China started from 1992, a 152.11 per cent increase for 1992 based on the previous year, and a 149.94 percent increase in 1993 over 1992, and a further 20 per cent growth in 1994, and over 10 per cent growth for both 1995 and 1996. Since 1993, China has been second only to the US as the major recipient of foreign direct investment, taking up to 15 per cent of total world FDI inflows. It has consistently absorbed between 30 to 40 per cent of the total annual FDI flowing to developing countries in the world, and China is ranked first among all developing countries in attracting foreign investments for the fifth straight year. However, the increase rate

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