The FDI Success Story

18 Feb

In 2001, China was formally approved to be a part of the World Trade Organisation (WTO) and FDI inflows into China in 2013 rose to a record $117.6 billion. (Reuters, 2014). The process of foreign direct investment (FDI) started to gather pace in 1979 after the “open door” policy. Before 1992 this involved opening up to foreign investment in special regions utilising foreign management practices, technology and knowledge. This steadily gathered pace, in line with the gradualism approach, and by 1992 most the country was open to investment and the government strongly encouraged most capital investment to go to inward provinces as part of the strategy to develop more agricultural sectors as well as reduce inequalities. Since then FDI has continued to increase its share in the total of actual foreign capital inflow as the graph below shows:

 

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After most the country was open to FDI, developing Asian nations dominated total FDI flows into China but since 1996 a growing portion of those flows came from other sources such as Europe and the US. FDI’s character into China slightly changed thereafter as different types of investment were starting to be implemented. A consequence of a rising percentage of FDI from Europe and North America was that overall the activities of foreign-invested enterprises in China became more focused on the domestic market, and less on export markets, in the late 1990s relative to the mid-1990s (Graham et al, 2002).

In 2005, China started its foreign exchange rate reform in July 2005 with the magnitude of FDI that goes into manufacturing industries indeed has been debated because some inflows have previously been reported to be used for speculation on Chinese currency appreciation or urban real estate properties (Wang, 2011). This was then termed “hot money” with the accusation that there were no long interests in direct investment but only short term super profits by taking advantage of favourable exchange rates. Many have since argued that this is the reason for China’s such high FDI growth which actually overstates the true value. In 2006, restrictions against this “hot money” were introduced by the State Administration of Foreign exchange particularly for domestic real properties with increased supervision of cross-border investments. Yet from the graph above, it is still clear to see that this did not prevent FDI thereafter.

Even today, FDI continues to grow strong in China with the Commerce Ministry showing that China attracted $10.76 billion worth in January, which was 16.1% up from last year’s figure (Reuters, 2014). The majority of this new investment went into China’s services sectors, with a significant fall in investment to the manufacturing sector. However inflows in China, despite suspected slow growth, are clearly still going from strength to strength.

 Charlotte Griffith

References

Wang, Lei. 2011., Foreign Direct Investment and Urban Growth in China. [online]. Ashgate. Available from:<http://www.myilibrary.com?ID=312876> 18 February 2014

Reuters. 2014. China’s January FDI rises in sign of confidence.   Economic times. Available from: < http://economictimes.indiatimes.com/news/international/business/chinas-january-foreign-direct-investment-rises-in-sign-of-confidence/articleshow/30607257.cms> 18 February 2014

Graham et al. 2002. Foreign Direct Investment In China: Effects On Growth And Economic Performance. Working Paper No. 01-03. Institute for International Economics.

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