How to Promote Manufacturing with Inward FDI in Developing Countries? Lessons from China

Abstract

Inward foreign direct investment (FDI) has been prioritized as a key instrument for promoting manufacturing in developing economies, yet its expected gains have not materialized in many countries. As an exception, China represents the most prominent case of a developing country that strategically harnessed FDI to achieve large-scale manufacturing upgrading. Using the Chinese manufacturing data, this paper shows how effective outcomes depend on strategic policy direction, coordinated institutions, and sustained investments in human capital, infrastructure, and supplier development. The policy implications include (a) shifts attention from FDI attraction to FDI absorption, (b) emphasizing performance-based incentives, (c) targeted industrial policies, (d) strengthened local capability systems, and (e) improved infrastructure.