ABSTRACT
This chapter investigates the impact of direct foreign investment (DFI) on foreign trade in the case of China, using both a macro and micro approach. It discusses the theories of the impact of direct foreign investment on foreign trade. The chapter presents an empirical investigation of the influence of DFI on China's exports, imports and trade balance, providing an empirical test for Kojima's hypothesis about DFI 'trade-creation' and 'trade-replacement'. It also investigates transfer pricing by multinational corporations (MNCs) in the case of China, probing their motivations and latitude to practice transfer pricing in Chinese circumstances and examining empirical evidence. Intra-firm trade and transfer pricing by MNCs also change the pattern and structure of international trade and effectively influence the distribution of income and trade gains in relevant countries. The activities of MNCs have an important impact on international trade. Transfer prices are the prices that MNCs set for intra-firm exports and imports across national boundaries.
