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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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