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China bucks global foreign
investment trend
BEIJING
- Annual global foreign direct investment
(FDI) dropped from US$1,388 billion to $560
billion between 2000 and 2003. But over the same
period, FDI in China grew steadily from $40 billion
in 2000 to $53 billion in 2003. Last year, the
figure topped $60 billion. Why the steady spurt of FDI
in China? A recent report published by the
Chinese Academy of Foreign Trade and Economic
Cooperation, a think-tank for the Ministry of
Commerce, titled the "2005 Report of
Transnational Corporations in China", underlines the reasons
and lays down strategies for the future.
China's investment environment has greatly
improved since the country joined the World Trade
Organization (WTO) in 2001. China is now
attractive to foreign investors because of its
stable and increasingly transparent investment
environment. It has become a competitive
manufacturing base as well as a lucrative and
promising market. This has made China an important
destination for multinational investments.
Since 2001, major multinationals have been
adjusting China's position in their global
strategies. Many have considerably increased their
investments in China over the past three years.
Japanese companies are the best example of this
trend. Nine major Japanese companies doing
business in China have established 200 new
enterprises in the nation since 2001. They now not
only regard China as an export base, but also a
key market and site for research and development
(R&D).
Many other big companies from
the US, Europe and South Korea have also set up
new firms in China. Multinationals operating in
China concentrated on manufacturing in the 1990s.
But intense competition among multinationals and
the challenge from Chinese companies has prompted
foreign firms to extend their value chain in
China. For the upstream, they have started to set
up R&D centers and key component manufacturing
bases; for the downstream, they have begun to
greatly increase their inputs into sectors like
sales and logistics. Between June 2003 and June
2004, foreign companies established 200 R&D
centers in China.
Consolidation
moves
Multinationals have been adjusting
the management structure of their China-based
operations. But their methods are somewhat
different. Some, such as Japan's Matsushita, put
previously independent business units under the
umbrella of the company's head office in China.
Some, like Finnish company Nokia, merged their
manufacturing bases while others, such as French
telecommunications firms Alcatel, grew by
acquiring stakes in other IT companies.
But the common thread that binds all of
these activities is the creation of group
companies where independent ventures had
previously operated. At the end of the day, these
firms will operate according to a single goal, a
single strategy, a single brand and operations
coordinated by the group. Such practices are
expected to significantly improve multinationals'
overall competitiveness in China.
Multinationals'
contributions
China has absorbed huge
amounts of resources from foreign investment.
Since China started its reforms in the late 1970s,
the country has attracted more than $550 billion
in FDI. Annual FDI currently accounts for 10% of
the country's fixed-asset investment.
Foreign-funded enterprises' exports and imports
account for more than half the nation's total; the
taxes they pay make up 20% of the total; and they
employ about 22 million workers.
On the
industrial front, foreign companies' participation
has spurred the development of many industries,
such as home appliances, packaging and logistics.
On the micro-economic level, Chinese companies
have grown thanks to cooperation and competition
with foreign firms. Chinese companies have learned
many new concepts from multinationals, such as
corporate governance and unfair competition.
With the development of manufacturing and
services industries, modern industrial workers and
professional managers have become new social
forces. Now people have broader perspectives and
pay more attention to national and global
developments. People's values have also become
more pragmatic and diversified. Foreign companies,
especially multinational ones, have played an
important role in bringing about these changes.
There have been discussions
and debates among researchers and in the media on
problems related to China's introduction of
foreign capital.
Gap between GDP
and GNI: Foreign investment has
contributed to China's prosperity by driving up
growth of gross domestic product (GDP). But the
country's gross national income (GNI) has failed
to grow at such a rapid rate. This means the
country is more prosperous, but not necessarily
richer. Some claim that foreign investment is a
factor behind this phenomenon. China's GNI lagged
behind its GDP every year between 1993 and 2003.
This indicates that a part of the value generated
in China - about 100 billion yuan (US$12 billion)
every year - did not end up being the income of
Chinese nationals. It actually flowed out of the
country as wealth of foreign citizens. Many,
however, believe this is an unavoidable situation
and say the gap will narrow as Chinese companies
increase their overseas investments and
operations.
Negative impact on innovation: Foreign
investment has long been regarded as a means of
upgrading the nation's technological level. But
many Chinese academics and managers now complain
that this goal has not been met. Though many
multinationals introduced state-of-the-art
technology to their China operations, many Chinese
employees cannot come to grips with the core
technology. Chinese enterprises and employees
working with foreign companies have not gained
much in terms of their research and development
capabilities. Foreign automakers, for example, are
even accused of discouraging research and
development activities in their joint ventures in
China. FDI's negative impact on China's
technological development can also be attributed
to the lack of an institutional framework and
policies supporting fair and orderly competition
in the market. With the rise of domestic
companies, this issue has become more pressing.
China is not overly dependent on foreign
investment, as indicated by the ratio of foreign
investments to GDP and the ratio of foreign
investments to total fixed assets investment. For
the first indicator, China is on par with the
average level of the developing world. If China's
GDP is calculated by Purchasing Power Parity
(PPP), the ratio for China is just half the global
average.
FDI's percentage in fixed-asset
investment is also below the global average. With
the growth of domestic investment, this figure is
expected to fall further. In fact, China still has
a good opportunity to absorb external resources.
With the progress of globalization, many
multinationals are regarding China as a link in
their global value chain. China is now a market
for them. For many of them, China is also a
manufacturing base, and to some an R&D and
service center.
The paper says China
should try to maintain foreign investment policy
stability during the cycle of economic adjustment,
relying more on market-based measures in the
adjustments in order to strengthen foreign
investors' confidence. Increasing competition from
neighboring countries for FDI justifies the
maintenance of some preferential policies for
foreign investors, it says. "We should bear in
mind that China is a country short of natural
resources. We have to use the resources we have
rich supplies of, such as low-cost manufacturing
capabilities and markets - to exchange with other
economies for the resources that we lack, such as
technology and raw materials. Foreign investment
is a key vehicle for this exchange."
(Asia
Pulse/XIC) |
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