Foreign Direct Investment in China: Issues and Challenges
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Case Code: ECON057 Case Length: 11 Pages Period: 2010-2016 Pub Date: 2017 Teaching Note: Available |
Price: Rs.500 Organization : - Industry : Financial Services Countries : China Themes: Economic transformation, FDI inflow and outflow, Overseas FDI strategy |
Abstract Case Intro 1 Excerpts
Excerpts
FDI in China
Since China adopted economic reforms in 1978, FDI had been playing a crucial role in promoting the swift and sound economic growth of the country. China was the largest recipient of Foreign Direct Investment among the developing countries for 24 consecutive years and FDI continued to play a disproportionately large role in promoting its trade, investment, and tax revenue generation. The visit of US President Richard Nixon (Nixon) to China in 1972 resulted in the country lifting the formal ban on FDI and opened the doors for a diplomatic detente between China and several major industrial nations of the world. However, a number of limitations on the FDI such as a ban on external financing of FDI projects jeopardized the scope for investment until the policies were dramatically changed in 1979. The continual progressive reform in Chinese trade policy since then was one of the major reasons for the huge FDI inflows into the country. Meanwhile, the former Chinese communist leader, Deng Xiaoping’s decision to open China to foreign capital and investment in line with the broad objective of accelerating economic growth helped the country to liberalize restrictions on external debt and equity finance, reducing government controls on foreign trade...
Changing Landscape of FDI
The changing economic environment made a significant impact on China’s attractiveness as a destination for foreign investment. Earlier, investors had considered China a lucrative avenue for the labor-intensive manufacturing industry, taking into account its large untapped market, fast economic growth, and low labor costs for their investments and operations. However, a distinct sector-based change took place in inward FDI absorption in China when the country moved up to transition into a market- , knowledge- , and consumption-driven economy. As China rebalanced its economy, moving away from its heavy dependence on exports and investment-led growth, FDI growth continued in the service sector which was growing in size and importance. Further, in 2014, the Chinese government issued a number of policies to facilitate FDI in service industries such as finance, health care, tourism, and entertainment in an effort to stabilize the growth of inward investment and improve the quality of investment. The new policy guidelines of the central government gave foreign investors better access to the Chinese market for financial services. The foreign firms entered the Chinese market to reap the consumption power of its vast population, which had been gradually unlocked. Their inclination to invest in China was further fueled by the government’s pledge to double the average per capita income by 2020 and its policy to open up the service industry....
Determining Factors
Political economy pundits said the economic, political, and institutional factors in China contributed to attracting FDI into the country. The government’s commitment to an open-door policy and market-oriented economic reforms gained the confidence of foreign investors in China...
Issues and Challenges
While China had the advantages of having been a lucrative destination for foreign investors for decades with its increased production facility, its economic slowdown and slow growth of per capita income and consumption resulted in periodic saturation of the country that placed multinationals in difficulty...
Way Forward
According to the UNCTAD’s World Investment Report 2016, China continued to maintain stable economic growth by utilizing FDI, which increased by 6 per cent to USD135.6 billion in 2015...
Exhibits
Exhibit I:FDI Inflows into China (Current Prices)
Exhibit II: Inward FDI Flows for China
Exhibit III: Value of China’s OFDI and FDI (2005-2014)
Exhibit IV: Eastern, Central and Western China’s share of Total FDI, 2010-2014
Exhibit V: China’s Global Outward FDI Boom Continues (USD billion: Percent)
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