Foreign Investment and Socio-Economic Development in China: The Case of Dongguan (review)

Foreign Investment and Socio-Economic Development in China: The Case of Dongguan, by Godfrey Yeung, is a survey of foreign-invested firms in one of China's most successful foreign-investment-driven local economies, that of Dongguan, in Guangdong Province. The book "investigates the causes and socioeconomic effects of foreign direct investment" in China (inside cover). Yeung visited and interviewed twenty-six foreign-invested firms in Dongguan between 1996 and 1997. His sample covered seven towns and a wide range of industries in the Dongguan region and enabled him to collect extensive, in-depth information that has helped provide a detailed, multidimensional view of how foreign-invested firms operate in China.

Yeung first reviews the existing literature on foreign direct investment (FDI), introduces the economy and the investment environment of Dongguan, discusses the socio-economic impact of FDI there, and concludes with an overall assessment that the effect of FDI on Dongguan's economic development has been positive. He also notes that "the inflow of foreign capital has had both 'desirable' and 'undesirable' socio-economic effects" (inside cover), and he summarizes this observation toward the end of the book:

All in all, the positive welfare gains generated by the inflow of foreign investment are able to overcome undesirable socio-economic impacts in Dongguan. Apart from rapid economic growth and an improvement in the living standards of the local population, foreign investment has been a powerful catalyst in the development of human capital endowment, social and physical infrastructure, locally-funded industry and the improvement of industrial productivity. However, foreign investment is also associated with the aggravation of crime, the intensification of labor abuse (especially of migrant workers), the generation of rent-seeking opportunities, the polarization of growth, and an increase in industrial (solid) waste pollution.

(p. 215 )

What I like most about the book is the detailed documentation of the operations of foreign-invested firms in Dongguan and their interactions with the government. For both business executives and researchers, a major frustration of doing or studying business in China is the lack of public information. This is due primarily to the nature of the business environment: laws tend to be opaque, policy making is secretive, and how the law is applied is based on personal connections. This is what makes Yeung's documentation and presentation of his findings extremely valuable. For example, in a discussion of bureaucratic red tape and abuse of power by officials, he provides a list of twelve different permits and certificates that an investor must possess in order to open a business and hire workers in Dongguan. The granting of permits and certificates is not automatic, and the rules are not clear, giving the local official in control considerable opportunity to extort bribes. What is worse, the government does not publish such a list of permits— without which an inexperienced foreign investor is lost in the bureaucratic maze. In order to navigate through the bureaucracy, investors must rely on well-connected local consulting firms. Yeung finds that "an application for a foreign investment project is more likely to be approved on time if the feasibility study is conducted by a specified consulting company which is an affiliated company of the Dongguan government" (p. 118). Yeung provides a rare detailed description of how firms must deal with and offer bribes to the customs authorities. He also provides detailed observations on shop-floor management. For example, he found an unusual "one-to-one product quality control" method used by a Hong Kong-funded children's-fashion firm: "150 workers sewing while another 150 workers stand nearby to constantly check the product quality and return substandard products to the worker immediately" (p. 189 ).

A shortcoming of the book is that the author does not provide an overall picture of China's political and economic systems and the transitions they are experiencing. Thus...