ABSTRACT
Introduction Pronounced disparities in income and economic opportunities between the coastal and inland regions of China are well documented in the literature. Factors responsible for these regional inequalities include preferential government policies, favourable geographical location, and superior infrastructure facilities in the coastal regions. Another factor contributing to the observed increase in regional disparities in China is insufficient linkages from important growth engines. This chapter explores the proposition that regional disparities in China are related intimately to the structure of exports and foreign direct investment (FDI), which results in limited linkages from these growth engines to inland regions. After embarking upon economic reforms in 1978, the Chinese government has been opening up the economy gradually to foreign trade and investment. In 1988, the government introduced a coastal regions’ development strategy and the two-ends outside policy,2 both of which encourage processing trade in order to exploit China’s comparative advantage in abundant cheap labour. Export-oriented FDI was encouraged by fiscal and financial incentives, for example, tax holidays and tax rebates for exports. As a result, exports of foreign-invested enterprises (FIEs) and exports due to processing trade have increased rapidly in the coastal regions.
