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zation, i.e. engaging in foreign production itself, rather than sub-contracting of licensing it to a foreign firm (Pont 2000). The philosophy of the theory is that an MNC carry out various activities that are interdependent and related through flows of intermediate products. Since market for intermediate products are difficult to organize, these transactions can be handled more efficiently within the firm by an internal hierarchy rather than by an external market.

2. The Current Pattern of FDI in China.中国FDI的模式。
In 1979, China introduced the Open Door policy and market reform, initiated by the establishment of Special Economic Zones (SEZs) in order to attract foreign capital. China formally started its strategy of economic reform and opening up to the outside world in 1978 in order to achieve the objective of modernization. On the external economic front, China formulated the Joint Venture Law in 1979 when foreign direct investment (FDI) was first permitted in China. In response to the progress in economic reform and opening-up, the Chinese economy has achieved a spectacular annual growth rate of over 8% and China is now a major host for FDI inflow in the world. The Word Trade Organization (WTO) accession makes it necessary for China to gradually establish an economic regime with economic mechanisms that are in line with the advanced market economies. This will promote further economic reform and accelerate China's economic growth.

Foreign Direct Investment has experienced rapid growth since 1979. The growth has been subject to considerable fluctuations at different times. In large part, the fluctuations of FDI reflect adjustments in Chinese government's policies and changes in the investment environment. In general, when China has a sound macro-economic performance and economic liberalization, a rapid growth in FDI inflow will take place. On the contrary, poor economic performance and government restrictions have tended to discourage economic reforms and halt the liberalization process. Then, the volume of foreign investment will decline (Sun 1999).

As shown in Table 2.1, actual FDI grew slowly in 1990 due political issues. However, beginning in 1991, China has greatly increased its amount of foreign investment. The amounts of actual FDI increased more than double in both 1992 and 1993 and rose a further one-fifth in 1994 to reach almost US$ 340 billion actual investment. The dramatic increases in FDI in the first half of the 1990s appear to be caused by four factors:

Firstly, the magnitude of aggregate FDI flowing to less developing countries (LDCs) increased significantly in the 1990s. China has been the world's largest FDI recipient among LDCs since 1993. In recent years, FDI to China accounts for 1/4 to 1/3 of total FDI inflow to LDCs.

Secondly, China's seemingly political stability, together with dramatic growth of the domestic economy after 1992, has led to a fundamental reassessment by foreign investors of China's economic and investment potential. As a result, China is regarded as a less risky political and economic environment by international risk assessment organizations such as Economist Intelligence Unit (Lardy, 1995).

Thirdly, China has systematically liberalized its foreign investment regime. Some of the preferential treatments to attract FDI such as special tax concessions, liberalized land leasing and so on, were only availab