Transcript Foreign Direct Investment in China

Foreign Direct Investment in
China
Seth Cox
3 March 2005
Foreign Direct Investment (FDI)
When is investment best defined as
‘direct?’
– When investment gives rise to foreign
control of domestic assets
– IMF- “…made to acquire a lasting
interest in an enterprise where the
investor has an effective voice in the
mamagment of the company”
Foreign Direct Investment (FDI)
Investment threshold set at state level
– US: ‘direct’ when stake exceeds 10%
– China (PRC): when stake exceeds 25%
Higher level to encourage larger investment?
Terms:
– Inflow- quantity of FDI flowing into state over
a given time period-dynamic measure
– Stock: total accumulation of investment at a
given point in time- static measure
FDI- What Does it Offer?
1.
2.
3.
4.
5.
6.
Capital- long-term, risky investment
Market Access- export markets
Promote Export-led strategies of growth
Employment
Technology- transfers increase productivity
Spillovers and Linkages- introduction of more
competitive environment and connections to
local industry boost productivity and output of
entire economy
What has FDI Done for China?
Role in Economic Transformation-General
–
–
–
–
Established new industrial branches
Employment opportunities
Technological transfers
Technological and Managerial Skills
Spillovers to domestic industry
– International Trade- boosted immensely
Export production by Foreign-Invested Enterprises
– Increased from 1% in ’85 to 45% in ‘98
FIE-Led Export Growth
Source: Lardy (1999)
# Approved
Applications
Approved
Inflow
Actual Inflow
1979 - 1982
922
6.01
1.17
1983
470
1.73
0.64
1984
1856
2.65
1.26
1985
3073
5.93
1.66
1986
1498
2.83
1.87
1987
2233
3.71
2.31
1988
5945
5.3
3.19
1989
5779
5.6
3.39
1990
7273
6.6
3.49
1991
12978
11.98
4.37
1992
48764
58.12
11.01
1993
83437
111.44
27.52
1994
47549
82.68
33.77
1995
37011
91.28
37.52
1996
24556
73.28
41.73
1997
21001
51
45.26
Sources: (State Statistical Bureau 1998), p. 138
The FDI Boom in China
In 2002 China was the #1 recipient of FDI
worldwide
Rapid FDI growth began in early 1990’s
– 1979-1992 FDI inflow of 20.2 billion USD
– 1997 stock stood at 196.8 billion USD
5 year inflow of 176.6 billion USD- accounts for 89%
stock!
– Compound annual growth rate of FDI @ 44%
from 1992-1997
GNP- FDI rose from 2% in ’92 to 5% in
’97
– FDI in S. Korea early ’90’s at .02% GNP
What happened in the early 1990’sspecifically 1992?
The FDI Boom in China
Source: China Business Review (Nov.-Dec. 2000)
-Investment booms in the early 1990’s then
retracts in the wake of the Asian financial crisis
What Accounts for the Boom?
Explicit Chinese policy premium on Foreign
capital- Why?
– Traditional Motivations- conventional gains
Productivity Improvements- significant spillovers and
linkages- more competitive environment
FIE’s almost twice as profitable as SOE’s
– 43,542 Industrial FIE’s w/ profit of 40.79 billion USD
– 86,982 SOE’s with a profit of 41.26 billion USD
– Average difference in profit of $462,445
Yet, no extraordinary policy shifts in 1991-92
What Accounts for the Boom?
Policy Motivations
Savings-Investment Gap– Countries need to subsidize industrialization, yet
lack foreign exchange- Doesn’t hold for PRC
– Savings Rate- higher @ 40.6% during boom yrs.
Lower from 1986-92 @36%
Saved more with more capital present?
– PRC as a Capital Exporter? (1998-WSJ)
PRC has 40% of reserves invested in US treasury bonds
(=56bn)
In 1998 exported approx. 16 billion USD
* In either case, the PRC had no chronic shortage of
domestic capital at the time of the FDI boom
* Yet, explicit policy premium on foreign capital
The Preference for Foreign Capital
Obvious benefits from conventional FDI
wisdom- transfers, spillovers and linkages
* Benefits must outweigh costs of courting FDI
There are consequences of the policy
preference
– Round-Trip FDI- Domestic capital exported to
acquire a foreign “domicile,” re-imported to
establish an FIE-No net capital gain
Estimated @ 25% total FDI by the World Bank
Problems of the Investment
Environment
Regional Protectionism- comparable to
regional ISI strategies
– To obtain market access, must produce w/i region
– Huge returns from producing within protective wall
Limited competition
– Also leads to similar predatory behavior & rentseeking
– Benefit: Regional competition to lure FDI will lead
to erosion of barriers to FDI at national level
Room for Improvement
Despite huge FDI stock, PRC still far below
other developing states in FDI per capita
measurements
–
–
–
–
–
In 2000: Brazil received $195 per capita
China got only $30 per head-15% Brazil's
OECD states- highly developed-avg. $1,320.9
Closest developing state is S. Africa $22.2
Next highest per capita ratio @ $54- Thailand
China still has far to go before achieving a
developed status
Attracting High-Quality FDI
High-Quality? Investment in longterm, capital-intensive projects in
high-tech sectors
– Majority of FDI in manufacturing
sectors(63%)
Heavily focused on light & intermed.
manufactures
The time will come to outsource these jobs
and move up the production ladder
– Just as S. Korea did (Nike)
– For now, China is the manufacturer to Asia
FDI in China by Sector, 1999
Sector
Projec
ts
Amount
Contra
cted
Amount
Utilized
($ million)
Farming, Forestry, Livestock Farming, Fishing
762
1,471.70
710.15
Mining
130
322.21
557.14
12,042
25,331.80
22,603.34
Textiles
535
1,198.52
1,370.89
Chemicals
867
1,758.74
1,919.28
Pharmaceuticals
198
692.62
684.41
Ordinary Machinery
485
904.47
976.69
Special Equipment
500
743.33
509.95
922
3,942.71
3,145.72
Power, Gas, and Water Production and Supply
116
1,635.19
3,702.74
Construction
247
1,096.19
916.58
10
53.97
4.52
205
1,114.01
1,551.14
Manufacturing
Electronic and
Telecommunications Equipment
Geological Prospecting and Water Conservancy
Transportation, Storage, and Post and
Telecommunications Services
FDI in China by Sector, 1999
Wholesale, Retail, and Food-related
Services
825
1,204.13
965.13
3
37.08
97.67
669
4,177.85
5,588.31
1,474
3,016.80
2,550.66
Healthcare, Sports, and Social Welfare
28
67.27
147.69
Education, Culture, and the Arts
29
60.72
60.72
Scientific Research Services
62
133.72
110.13
316
1,488.52
752.68
16,91
8 41,223.02
40,318.71
Finance and Insurance
Real Estate
Social Services (including Hotels)
Others
Total
NOTE: Totals may not add up because of rounding.
Sources: PRC National Bureau of Statistics, China Monthly Statistics, China
Statistical Yearbook, 2000; Ministry of Foreign Trade and Economic Cooperation
Attracting High-Quality FDI
Ways to attract higher-quality FDI
1) Construct a predictable policy regimeovercome weaknesses of regulatory
framework
a) Investors desire stability more than incentives
2) Legal System- ambiguous and ineffectual
a) Better trained lawyers
b) Courts free of politicization
c) Impartial and consistent application and
enforcement of (existing)regulatory law, esp. IPR
d) Enforce ‘rule of law’ consistently and broadly
Attracting High-Quality FDI (cont.)
3. Centralize economic policy-making
process- end market segmentation
a) Financial market inefficiency one sourcedistribute capital on regional lines
b) Regional director’s autonomous power
another source
4. Simplify Catalog Regime- part of policy
a) Remove classifications of “Restricted” and
“Permitted” so all investment is categorized
as either “Prohibited” or “Encouraged”-reduce
ambiguity
Attracting High-Quality FDI (cont.)
5. Streamline approval process for FDI
a) Spread the “one-stop” shop idea wider
6. Untapped Potential- OECD states account for
about 90% of total world FDI
a) Much of this in the form of mergers and acquisitions
(M/A)
b) M/A negligible portion of Chinese FDI- partially due
market segmentation and local protectionism
7. Competition Policy- Finish off the SOE’s, only
the largest remain
a) Will bolster competitive operating environment as a
whole, shifting all enterprise to a hard-budget
constraint