Country profiles of inward and outward foreign direct investment issued by the Vale Columbia Center on Sustainable International Investment October 18, 2010 Editor-in-Chief: Karl P. Sauvant Editor: Thomas Jost Associate Editor: Ken Davies Managing Editor: Ana-Maria Poveda-Garces
Inward FDI in China and its policy context
by Ken Davies∗ After opening its doors to foreign trade and investment in 1978, China has become the largest recipient of inward foreign direct investment (IFDI) among developing and transition economies. The early policy of investment attraction by means of fiscal incentives and special economic zones has been relaxed now that many - though still not all - operating environment deficiencies have been effectively addressed and strong domestic enterprises have developed. While China remains the developing world’s favorite investment destination, the government is adopting a more selective approach that may result in slower IFDI growth. Although the global crisis reduced FDI inflows to China, this impact was lower than in many other FDI destinations, and flows have recovered considerably. Trends and developments Country level developments From the establishment of the People’s Republic of China in 1949 to the adoption of economic reforms in 1978, there was almost no foreign investment in China. In the 1980s, experiments with joint ventures resulted in a trickle of FDI inflows dominated by the relocation of most of Hong Kong’s manufacturing to South China. IFDI first topped US$ 1 billion in 1984 and by 1991 was US$ 4.4 billion. 1 With new urgency given to foreign investment attraction at the beginning of 1992 and the formal establishment of a market economic system in that year, IFDI inflows accelerated rapidly, reaching US$ 11 billion in 1992, continuing up to a plateau of US$ 45 billion per year in 1997-1998. Following a
Ken Davies (email@example.com) is Senior Staff Associate at the Vale Columbia Center for Sustainable International Investment. The author wishes to thank Edward Turner, Guoming Xian and Benny Yan for their helpful comments. The views expressed by the author of this Profile do not necessarily reflect opinions of Columbia University, its partners and supporters. Columbia FDI Profiles is a peer-reviewed series. 1 Ministry of Commerce of the People’s Republic of China (MOFCOM), Statistics, available at: www.fdi.gov.cn; UNCTAD, FDI/TNC database, available at: http://stats.unctad.org/fdi/.
decline to around US$ 40 billion a year in 1999-2000, and after China’s accession to the World Trade Organization (WTO) in 2001, FDI inflows have continued to rise steadily.2 By 2009, China had accumulated an IFDI stock of US$ 473 billion3 (annex table 1), well ahead of other large developing and transition economies such as Brazil, with US$ 401 billion, India, with US$ 164 billion, and Russia, with US$ 253 billion (annex table 1). From 2000 to 2009, China received larger FDI inflows than any other developing or transition economy, reaching a record US$ 108 billion in 2008. By comparison, 2008 IFDI flows to Brazil were US$ 45 billion, India US$ 42 billion and Russia US$ 70 billion. In 2009, China’s FDI inflows fell to US$ 90 billion as a result of the global economic crisis, while Brazil’s fell more sharply to US$ 26 billion, Russia’s to US$ 39 billion, and Indian’s IFDI to US$ 35 billion (annex table 2). China’s FDI inflows recovered strongly in the first eight months of 2010. The relatively good performance of IFDI into China during both the Asian crisis of 1997-1998 and the current crisis reflects international investor perceptions of China as a reliable risk-avoidance haven. Partly because of China’s WTO commitments to a phased opening up of services to foreign participation during the five years following accession, the share of the tertiary sector in total IFDI flows rose from 31% in 2001 to 52% in 2008, while at the same time the share of the secondary sector...