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Unformatted text preview: 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 perioddynamic 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 longterm, risky investment Market Access export markets Promote Exportled 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 TransformationGeneral Established new industrial branches Employment opportunities Technological transfers Technological and Managerial Skills
Spillovers to domestic industry International Trade boosted immensely Increased from 1% in '85 to 45% in `98 Export production by ForeignInvested Enterprises FIE-Led Export Growth Source: Lardy (1999) # Approved Applications
1979 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 922 470 1856 3073 1498 2233 5945 5779 7273 12978 Approved Inflow
6.01 1.73 2.65 5.93 2.83 3.71 5.3 5.6 6.6 11.98 Actual Inflow
1.17 0.64 1.26 1.66 1.87 2.31 3.19 3.39 3.49 4.37 1992 1993
1994 1995 48764 83437
47549 37011 24556 21001 58.12 111.44
82.68 91.28 73.28 51 11.01 27.52
33.77 37.52 41.73 45.26 1996 1997 In 2002 China was the #1 recipient of FDI worldwide Rapid FDI growth began in early 1990's 19791992 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! The FDI Boom in China GNP FDI rose from 2% in '92 to 5% in '97 FDI in S. Korea early '90's at .02% GNP Compound annual growth rate of FDI @ 44% from 19921997 What happened in the early 1990's specifically 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 199192 What Accounts for the Boom? Policy Motivations
SavingsInvestment Gap Countries need to subsidize industrialization, yet lack foreign exchange Doesn't hold for PRC Savings Rate higher @ 40.6% during boom yrs. PRC as a Capital Exporter? (1998WSJ)
Lower from 198692 @36% Saved more with more capital present? * 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 PRC has 40% of reserves invested in US treasury bonds (=56bn) In 1998 exported approx. 16 billion USD The Preference for Foreign Capital
Obvious benefits from conventional FDI wisdom transfers, spillovers and linkages There are consequences of the policy preference
* Benefits must outweigh costs of courting FDI RoundTrip FDI Domestic capital exported to acquire a foreign "domicile," reimported to establish an FIENo 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 head15% Brazil's OECD states highly developedavg. $1,320.9 Closest developing state is S. Africa $22.2 Next highest per capita ratio @ $54 Thailand China still has far to go before achieving a developed status Attracting High-Quality FDI
HighQuality? Investment in longterm, capitalintensive projects in hightech sectors Majority of FDI in manufacturing sectors(63%)
Heavily focused on light & intermed. manufactures The time will come to outsource these jobs and move up the production ladder Just as S. Korea did (Nike) For now, China is the manufacturer to Asia FDI in China by Sector, 1999 Sector Projec ts Amount Contra cted Amount Utilized ($ million) Farming, Forestry, Livestock Farming, Fishing Mining Manufacturing Textiles Chemicals Pharmaceuticals Ordinary Machinery Special Equipment Electronic and Telecommunications Equipment Power, Gas, and Water Production and Supply 762 130 12,042 535 867 198 485 500 922 1,471.70 322.21 25,331.80 1,198.52 1,758.74 692.62 904.47 743.33 3,942.71 710.15 557.14 22,603.34 1,370.89 1,919.28 684.41 976.69 509.95 3,145.72 116 1,635.19 3,702.74 FDI in China by Sector, 1999 Wholesale, Retail, and Food-related Services Finance and Insurance Real Estate Social Services (including Hotels) Healthcare, Sports, and Social Welfare Education, Culture, and the Arts Scientific Research Services Others Total 825 3 669 1,474 28 29 62 316 1,204.13 37.08 4,177.85 3,016.80 67.27 60.72 133.72 1,488.52 965.13 97.67 5,588.31 2,550.66 147.69 60.72 110.13 752.68 40,318.71 16,91 41,223.02 8 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
1) Construct a predictable policy regimeovercome weaknesses of regulatory framework 2) Legal System ambiguous and ineffectual
a) b) c) d) a) Investors desire stability more than incentives Ways to attract higherquality FDI Better trained lawyers Courts free of politicization Impartial and consistent application and enforcement of (existing)regulatory law, esp. IPR Enforce `rule of law' consistently and broadly Attracting High-Quality FDI (cont.)
1. Centralize economic policymaking process end market segmentation
a) Financial market inefficiency one source distribute capital on regional lines b) Regional director's autonomous power another source a) Remove classifications of "Restricted" and "Permitted" so all investment is categorized as either "Prohibited" or "Encouraged"reduce ambiguity 2. Simplify Catalog Regime part of policy Attracting High-Quality FDI (cont.)
1. Streamline approval process for FDI 2. 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 a) Spread the "onestop" shop idea wider 3. 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 hardbudget constraint ...
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This note was uploaded on 07/17/2008 for the course ECON 508 taught by Professor Fleisher during the Winter '06 term at Ohio State.
- Winter '06