FEATURE STORY

Foreign Direct Investment – the China story

July 16, 2010


STORY HIGHLIGHTS
  • China has been successful in mobilizing inward Foreign Direct Investment (FDI).
  • Inbound FDI has played an important role in China’s economic development and export success.
  • FDI policies in China have evolved alongside economic development and strengthened institutional capacity.

Beijing, July 16, 2010 - China has been successful in mobilizing inward Foreign Direct Investment (FDI).  Attracted by the country’s investment opportunities and by its sheer size and growing domestic market, China received about 20 percent of all FDI to developing countries over the last 10 years and over $100 billion in 2008.  In terms of share of GDP and investment, FDI accounted for some 2.5 percent of GDP on average over the last five years.  While this may appear to be low it can be easily explained by the overall size of the economy: China is the third largest economy of the world, just behind Japan and the United States of America.

Inbound FDI has played an important role in China’s economic development and export success.  According to the Ministry of Commerce (MOFCOM), foreign invested enterprises account for over half of China's exports and imports; they provide for 30% of Chinese industrial output, and generate 22% of industrial profits while employing only 10% of labor – because of their high productivity.  Evidence on technology spillovers is more limited, but industries with higher FDI seem to have higher productivity increases than other industries, suggesting a positive effect.  Importantly, foreign investment has catalyzed China’s economic reform.  Together, these contributions have supported China in maintaining a record-high 10 percent growth rate during most of the 1980-2010 period.  

FDI policies in China have evolved alongside economic development and strengthened institutional capacity. A gradual and prudent approach has been taken in the process of liberalization. When market institutions were not fully in place in 1980s and 1990s, China experimented with opening up to foreign investment in selected coastal cities and in special economic zones/industrial parks with a focus on attracting export-oriented manufacturing FDI.  Corresponding to China’s shift of its development goal from an emphasis on GDP growth towards a more harmonious balanced development, China made a radical commitment to services liberalization in its accession to WTO.  This has triggered a shift of FDI to  service industries.  By 2009, FDI in services increased 3 times from that in 2000, while manufacturing FDI in China increased 81 percent. Regional production networks in East Asia grew substantially in the past few years and were largely aligned with China as their center. The results have been extraordinary.  Thousands of multinational corporations have invested in China. The latest UNCTAD report on World Investment Perceptions lists China in first place among the top 15 investment locations. Hong Kong SAR and Taiwan, China have traditionally been the most important sources of FDI, but the presence of investors from Japan, the USA, and Europe has grown over the years.

China has been quite open for FDI in almost all manufacturing and most service industries. But China has been circumspect in its gradual approach to liberalization to synchronize it with the development of institutional capacity.  Arguably, this has served China well to weather the financial crisis. Looking into the near future there may be a case for further liberalization of backbone services such as finance and telecommunication.

China’s highly decentralized FDI approval and policy implementation creates opportunities for  healthy competition for FDI among local authorities but can also become cause of excessive red tape and corruption. In such a decentralized environment transparency of regulation and open communication between Government and business community is of special importance. To this end, local governments are increasingly seeking to ensure the administrative and operational efficiency of the approval process.  The most common practice is setting up “one-stop” facilities, which aim at allowing investors to conduct all procedures in one place. 

The World Bank Group recently published its Investing Across Borders 2010 report.  The report is a new study comparing regulation of inbound foreign direct investment across four topics for 87 countries. It presents indicators only on countries’ laws, regulations, and practices affecting how foreign companies invest across sectors, start businesses, access industrial land, and arbitrate commercial disputes. As such its scope is intentionally limited. It does not cover all circumstances relevant for foreign investors. As stated in the report, for example, in addition to assessing the legal and regulatory framework, it is well established that investors value the economic size of the host country, its domestic market and proximity to important foreign markets, the potential for innovation, and the level and quality of government services; and an educated and skilled workforce.  From the host country’s point of view, the risk of negative externalities from foreign investments, such as environmental and social damage (especially if the poor are the ones affected) needs to be balanced with the opportunity of positive externalities that such investments can yield. The Country profiles of the report need to be read with that context in mind.

The challenge for China now is to attract the right kind of FDI as it strives to rebalance its economy, improve the environment, and move up the value chain. As a result, recent FDI strategies have taken a more selective approach, to attract environmentally sustainable, energy efficient, and technologically advanced industries. As befits its economic global rank China is providing a level playing field for all firms, domestic or foreign alike.

China has been quite open for FDI in almost all manufacturing and most service industries. But China has been circumspect in its gradual approach to liberalization to synchronize it with the development of institutional capacity.  Arguably, this has served China well to weather the financial crisis. Looking into the near future there may be a case for further liberalization of backbone services such as finance and telecommunication.

China’s highly decentralized FDI approval and policy implementation creates opportunities for  healthy competition for FDI among local authorities but can also become cause of excessive red tape and corruption. In such a decentralized environment transparency of regulation and open communication between Government and business community is of special importance. To this end, local governments are increasingly seeking to ensure the administrative and operational efficiency of the approval process.  The most common practice is setting up “one-stop” facilities, which aim at allowing investors to conduct all procedures in one place. 

The World Bank Group recently published its Investing Across Borders 2010 report.  The report is a new study comparing regulation of inbound foreign direct investment across four topics for 87 countries. It presents indicators only on countries’ laws, regulations, and practices affecting how foreign companies invest across sectors, start businesses, access industrial land, and arbitrate commercial disputes. As such its scope is intentionally limited. It does not cover all circumstances relevant for foreign investors. As stated in the report, for example, in addition to assessing the legal and regulatory framework, it is well established that investors value the economic size of the host country, its domestic market and proximity to important foreign markets, the potential for innovation, and the level and quality of government services; and an educated and skilled workforce.  From the host country’s point of view, the risk of negative externalities from foreign investments, such as environmental and social damage (especially if the poor are the ones affected) needs to be balanced with the opportunity of positive externalities that such investments can yield. The Country profiles of the report need to be read with that context in mind.

The challenge for China now is to attract the right kind of FDI as it strives to rebalance its economy, improve the environment, and move up the value chain. As a result, recent FDI strategies have taken a more selective approach, to attract environmentally sustainable, energy efficient, and technologically advanced industries. As befits its economic global rank China is providing a level playing field for all firms, domestic or foreign alike.

 

China has been quite open for FDI in almost all manufacturing and most service industries. But China has been circumspect in its gradual approach to liberalization to synchronize it with the development of institutional capacity.  Arguably, this has served China well to weather the financial crisis. Looking into the near future there may be a case for further liberalization of backbone services such as finance and telecommunication.

China’s highly decentralized FDI approval and policy implementation creates opportunities for  healthy competition for FDI among local authorities but can also become cause of excessive red tape and corruption. In such a decentralized environment transparency of regulation and open communication between Government and business community is of special importance. To this end, local governments are increasingly seeking to ensure the administrative and operational efficiency of the approval process.  The most common practice is setting up “one-stop” facilities, which aim at allowing investors to conduct all procedures in one place. 

The World Bank Group recently published its Investing Across Borders 2010 report.  The report is a new study comparing regulation of inbound foreign direct investment across four topics for 87 countries. It presents indicators only on countries’ laws, regulations, and practices affecting how foreign companies invest across sectors, start businesses, access industrial land, and arbitrate commercial disputes. As such its scope is intentionally limited. It does not cover all circumstances relevant for foreign investors. As stated in the report, for example, in addition to assessing the legal and regulatory framework, it is well established that investors value the economic size of the host country, its domestic market and proximity to important foreign markets, the potential for innovation, and the level and quality of government services; and an educated and skilled workforce.  From the host country’s point of view, the risk of negative externalities from foreign investments, such as environmental and social damage (especially if the poor are the ones affected) needs to be balanced with the opportunity of positive externalities that such investments can yield. The Country profiles of the report need to be read with that context in mind.

The challenge for China now is to attract the right kind of FDI as it strives to rebalance its economy, improve the environment, and move up the value chain. As a result, recent FDI strategies have taken a more selective approach, to attract environmentally sustainable, energy efficient, and technologically advanced industries. As befits its economic global rank China is providing a level playing field for all firms, domestic or foreign alike.

China has been quite open for FDI in almost all manufacturing and most service industries. But China has been circumspect in its gradual approach to liberalization to synchronize it with the development of institutional capacity.  Arguably, this has served China well to weather the financial crisis. Looking into the near future there may be a case for further liberalization of backbone services such as finance and telecommunication.

China’s highly decentralized FDI approval and policy implementation creates opportunities for  healthy competition for FDI among local authorities but can also become cause of excessive red tape and corruption. In such a decentralized environment transparency of regulation and open communication between Government and business community is of special importance. To this end, local governments are increasingly seeking to ensure the administrative and operational efficiency of the approval process.  The most common practice is setting up “one-stop” facilities, which aim at allowing investors to conduct all procedures in one place. 

The World Bank Group recently published its Investing Across Borders 2010 report.  The report is a new study comparing regulation of inbound foreign direct investment across four topics for 87 countries. It presents indicators only on countries’ laws, regulations, and practices affecting how foreign companies invest across sectors, start businesses, access industrial land, and arbitrate commercial disputes. As such its scope is intentionally limited. It does not cover all circumstances relevant for foreign investors. As stated in the report, for example, in addition to assessing the legal and regulatory framework, it is well established that investors value the economic size of the host country, its domestic market and proximity to important foreign markets, the potential for innovation, and the level and quality of government services; and an educated and skilled workforce.  From the host country’s point of view, the risk of negative externalities from foreign investments, such as environmental and social damage (especially if the poor are the ones affected) needs to be balanced with the opportunity of positive externalities that such investments can yield. The Country profiles of the report need to be read with that context in mind.

The challenge for China now is to attract the right kind of FDI as it strives to rebalance its economy, improve the environment, and move up the value chain. As a result, recent FDI strategies have taken a more selective approach, to attract environmentally sustainable, energy efficient, and technologically advanced industries. As befits its economic global rank China is providing a level playing field for all firms, domestic or foreign alike.

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