China's FDI Net Inflow and Deterioration of Terms of Trade: Paradox and Explanation

Starting from the contradiction between China's sustained growth in foreign direct investment (FDI) net inflow and deterioration of the terms of trade, this paper analyzes the characteristics of FDI sectoral structure since the 1990. Moreover, considering the international market competitive environment, this paper gives a concrete analysis of the influence mechanism and concludes that the flowing of FDI into labor-intensive export sectors caused the deterioration of China's terms of trade. To improve its terms of trade, China needs to direct FDI inflow into capital- and technology-intensive sectors and service sectors. Copyright The official journal of The Institute of World Economics and Politics, Chinese Academy of Social Sciences (CASS) 2007.