Overseas investment trends change Mao Yunshi and Yuan JingChina Daily Updated: 2005-10-11 05:59
Since China adopted the reform and opening-up policy in the late 1970s,
foreign investment has played an increasingly important role in its economic
growth, which makes exploring the new trends in the inflow of foreign capital a
necessity.
According to the World Investment Report for 2004, drafted by the United
Nations Conference on Trade and Development, China absorbed a total of US$53.5
billion worth of foreign direct investment (FDI) in 2003. Other statistics also
point to the importance of foreign capital in China's economic growth.
Foreign enterprises account for 28 per cent of China's industrial added value
and one-fifth of taxation. They export about 57 per cent of the country's total
goods and services and account for 11 per cent of local employment.
China's preferential foreign investment policies, inexpensive labour,
increasing purchasing power and improving investment environment, especially
after entry into the World Trade Organization (WTO) in 2001, have made the
country a favourite destination for global investment.
As the local investment environment improves, foreign investment in China has
given rise to new trends and characteristics.
Statistics show foreign investment in the country has increased steadily
since 1992, although its growth rate was not as high as in the 1980s. In 2001,
the inflow of foreign capital to China increased by 15 per cent, which went
against the global contracted trend. Since that year, China has become the only
country that has seen its FDI increase continually.
In terms of geographical distribution, most FDI is bound for the prosperous
eastern areas, which, with their advanced infrastructure and cost-cutting
information networks, have absorbed about 85 per cent of foreign investment in
China since the early 1990s.
A new trend is foreign capital inflows moving gradually from the Pearl River
Delta to the Yangtze River Delta. This is because the Pearl River Delta region,
the first on the mainland to accommodate foreign investment, has lost its
advantages in terms of labour cost and preferential policies while Shanghai has
caught up thanks to its high quality of labour, its leading role in the national
economy and its new investment policies that are often more favourable than
those of Guangdong.
In terms of industrial layout, foreign investment in China has concentrated
on secondary industries, but tertiary industries have become the latest
destination for China-bound FDI. As China fulfills its WTO commitments, it will
further open up the financial, insurance, telecommunications, energy, water,
commercial, accounting, auditing and legal sectors, which are expected to absorb
more foreign investment.
Statistics show that initially, foreign enterprises have seen China as a
place to digest out-dated technologies. American scholars CK Parahalad and
Kenneth Lieberthal have pointed out that in the 1980s, multinationals saw the
world's new markets, such as China, India and Brazil, as a venue for selling
their out-dated products.
But as market competition intensifies in China, many foreign firms have
increasingly adopted new technologies to maintain their market shares. The
number of patents registered by multinationals in China has been rising rapidly
since the early 1990s, up by 30 per cent on average annually.
It is clear those companies see China as a new focus of their global strategy
and have put more emphasis on localization of their research and development
(R&D) capacities.
Multinationals have built more R&D centres in China. According to the UN
world investment report for 2001, by the end of 2000, they had established more
than 100 such centres in China. Most of them are located in Beijing, Shanghai
and Guangzhou.
The localization of the R&D capacities of multinationals is driven by
intensifying market competition. It can speed up the launch of new products on
the domestic market, which is crucial for grabbing market share.
Meanwhile, it can help improve relations between multinationals and the host
country, which often hopes multinationals can transfer more state-of-the-art
technologies.
Multinationals that used to form join ventures with domestic investors are
seeking to establish solely-funded firms to strengthen corporate control,
improve efficiency and better co-ordinate corporate resources.
Statistics from 1984 to 2002 show that since 1990, the number of
solely-funded foreign firms has been on the rise. In the 1997-2001 period, more
than 50 per cent of newly registered firms were solely funded by foreign
investors. The proportion of investment by joint ventures has slumped from more
than 50 per cent before 1994 to 31.5 per cent in 2000.
Even at those joint ventures, foreign shareholders tend to increase their
investments to wield greater corporate control.
This is in line with the development strategies of multinationals that have
boldly entered the Chinese market to strengthen their control. By forming a
corporate network, they reduce overall costs of their operations and optimize
their local presence.
Siemens, for example, has established 41 joint-venture subsidiaries in many
fields. In 1994, it formed Siemens Ltd China to provide managerial and
investment support for its China-based subsidiaries. It also set up training
centres in Beijing and Nanjing to provide high-calibre professionals for the
conglomerate.
The establishment of Siemens Ltd China is a sign that multinationals have
sought to re-organize their presence in China. This is a must as many of their
subsidiaries have been scattered and segmented as they trailblazed across China
in the early stages of development. Their China headquarters now serve as an
effective platform from which to co-ordinate businesses.
To this end, multinationals often first establish a holding company to
reorganize existing assets or expand investment. Then the holding companies
streamline subsidiaries to reduce material procurement and distribution costs.
To further reduce costs, the multinationals also require their component
suppliers to move to China to form a complete supply chain, which makes products
more price-competitive.
The auto industry is a telling example. By last May, the more than 50 core
component providers for Japanese car maker Honda had opened or planned to open
branches in Guangzhou, where Honda has its key manufacturing base in China.
While many foreign investors are increasing investment in China, some have
retreated from the Chinese market, including large-scale multinationals.
Intensified competition is an important factor behind the withdrawals.
(China Daily 10/11/2005 page4)
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