A New Trend in China’s FDI Inflow and Outflow

Monday,July 17,2006 Posted: 16:48 BJT(0848 GMT)  China Economist

(JIANG Xiao-juan, professor,
Graduate School of the Chinese Academy
of Social Sciences)

Editorial note: In the history of the world economy, few large nations have been as accommodating to foreign investors as China. Lately, however, there has been much controversy regarding the impact of foreign investment on the Chinese economy and the policies China should adopt in relation to this. In the following article, Professor Jiang Xiao-juan, an authoritative voice on foreign investment, shares her thoughts upon the new trends in China’s FDI inflow and outflow. Her analysis will help us to understand the various changes in Chinese policy towards foreign investment.

Following more than a decade of abundant FDI inflow, there have been striking changes to China’s status in the global investment landscape. Firstly, as an FDI host country her corresponding status has been lowered, as is manifested by the fact that the percentage of foreign investment in the nation’s fixed capital formation aggregates is declining and her ranking among FDI recipient countries is going down. Secondly, FDI outflow remains strong and, with overseas investment likely to top 80 million dollars within the next five years, China is well on her way to becoming one of the largest FDI source countries in the developing world. Thirdly, China has vastly diversified utilization of foreign capital and technology, evidenced by the fact that she is increasingly utilizing foreign capital in non-FDI ways, attracting FDI and investing abroad by way of purchases and acquisitions, drawing more FDI into the service industry, and strengthening her ability to make use of global technological resources. These changes have complicated interaction between cross-border capital flow and the domestic economy. Given this new situation, it is necessary for China to consider her needs in commodity and production-factor circulation as well as her rights and interests as both an FDI host country and an FDI source so as to integrate herself into the global economy in a more harmonious and rational way.

China’s GDP will reach 2,000 US dollars per capita during the 11th Five-Year Plan. According to an established international investment theory, this will push the country into the third stage of multinational foreign direct investment, a stage at which FDI outflow will surpass FDI inflow, and net cash inflow will begin to diminish. This trend is already manifesting itself, particularly in three aspects: 1) the percentage of FDI in gross fixed asset formation is shrinking slowly and the nation’s status as an FDI host country is in the middle of a downturn, although still fairly stable; 2) the volume of non-FDI investment is increasing, and global resources such as capital and technology are being put to more diverse use; and 3) overseas investment is burgeoning in a sustained manner, and steadily enhancing China’s international position as an FDI source. These changes are attributable to the interaction between steady intensification of reform and opening up to the outside world, improved competitiveness of domestic industries, and rules governing international capital flow. They are unmistakable signs that China’s efforts in opening up have reached a new stage, with the one-way flow of capital and other production factors having developed into a two-way traffic as the nation continues to enhance its global resource allocation capability and the domestic economy enters into a more complex interactive relationship with foreign economies. This new situation poses both new opportunities and new challenges.
1. Decline in status as an FDI host country
(I) The percentage of FDI in China’s gross fixed capital formation has dropped below the average level of developing countries and that of central and eastern European countries In the 1990s, FDI inflow was snowballing and, in 1991-1997, accounted for 12.3% of the nation’s domestic fixed asset formation aggregates, a percentage that was higher than the average level of any other country or classification group.i Global FDI flow has maintained impressive momentum over the last few years. In China, however, growth in the volume of utilized FDI is slowing down while domestic investment is growing rapidly. Although the nation remains the largest FDI host country among developing nations, the proportion of gross fixed asset formation resulting from FDI is declining steadily. In 2004, it dropped to 8.2%, lower than the average levels of 10.5% for developing countries and 19.1% for central and eastern European nations, and slightly higher than the average level of all nations and that of developed countries. (See Table 1 and Figure 1.)

(II) China is sandwiched between large developing countries
It makes more sense to compare China, the largest developing country, with other large developing countries. Table 2 indicates that in 1997, FDI accounted for 14.8% of the gross fixed capital formation in China, a percentage which ranked second among large developing countries. By 2004, however, it dropped to 8.2%, below the average level of 9.6% of large developing countries. To be specific, Brazil, Nigeria, Mexico, Russia, the Ukraine, Vietnam, Egypt, and Ethiopia all had higher percentages of FDI in gross fixed capital formation than China, which is sandwiched somewhere in the middle of all large developing countries.

(III) The percentage of FDI in gross fixed asset investment is steadily declining

A vertical domestic comparison indicates that the importance of FDI as a source of funds is also diminishing. The percentage of utilized FDI in China’s gross fixed asset investment has been in decline ever since hitting an all-time high of 17.1% in 1994, sinking as low as 6.7% in 2004. In 2005, China actually used 60.3 billion US dollars of FDI and its percentage in the country’s gross fixed asset investment decreased further to 5.6%.ii (See Table 3.)

One view ascribes the declining percentage of FDI in the nation’s gross fixed asset investment to the impact of stricter statistical work concerning foreign investment over the last two years. In order to see if this opinion holds water, let us cite two economic indicators that do not depend upon statistics provided by foreign investment administrative authorities. One is the data on investment in fixed assets. Foreign investment is one of several categories featured in China’s statistical work upon investment in fixed assets. (See Table 4 for these statistics.)

The other is the table of balance between international revenue and expenditure; I have used the FDI volumes listed in this table to calculate the percentage of FDI in gross fixed asset investment. (See Table 5 for the results.) Both groups of statistics point to the same conclusion: the percentage of FDI as a source of funds in the nation’s gross fixed asset investment is indeed diminishing. Figure 3 depicts these changes, calculated in three different ways.

My analysis indicates that, measured against certain major indicators, the proportion of FDI in China’s gross fixed asset investment is steadily decreasing and China’s relevant status as an FDI host country is also falling.

(IV) Competition is improving the level of FDI

The changes in FDI are influenced by two major factors: intense competition between nations for FDI, and changes in the positions of foreign-invested companies in the Chinese market. Developing countries and central Asian and eastern European countries have readjusted their policies in order to encourage foreign investment,iii providing more choices for prospective investors. At this point, allow me to analyze a major change in the Chinese market. In the early days, FDI and the technology that accompanied it were “rare” production factors, and both those “investing in China” and those “absorbing investment from overseas” could anticipate definite economic returns from their actions. Such anticipations provided the market foundations for a sustained large-scale FDI increase in China.

With the influx of FDI and with Chinese companies growing more competitive, competition on the domestic turf is intensifying, which has brought about a change in terms of the profits of foreign-invested companies in certain industries. In fields where foreign investment was concentrated, such as automobile manufacturing, electronics and telecommunication equipment, detergents, household electrical appliances, foodstuffs and drinks, enterprises were seeing their profits shrink as a result of fierce market competition. Take the automobile industry for instance. Beginning in 2004, as competition forced the prices of cars to drop rapidly, car manufacturers are making far less money than they did before. Figure 4 gives some idea about the automobile industry’s changing growth rates in gross assets, sales revenue and gross profits as well as its changing capital profit rate and sales profit rate; it shows that the industry began to register negative growth in 2004, a situation which prompts prospective investors to be more cautious than ever before.iv

With competition escalating in the Chinese market and with the automobile industry in the process of upgrading, foreign-invested companies cannot hope to survive in the Chinese market without using competitive technology and producing competitive products. Additionally, many multinational corporations have established research and development institutes in China.

According to an UNCTAD study, China is currently the first choice for multinational corporations seeking research and development sites. As many as 61.8% of companies around the world listed China as their number one location for establishing overseas research and development centres in the period 2005-2009; the United States came second with 41.2% of the votes and India came third, gaining approval from 29.4% of the multinational corporations (UNCTAD, 2005 version in simplified Chinese). This trend proves that FDI is instrumental in bringing in more advanced technology and raising research and development capability, thereby further increasing our country’s industrial competitiveness.

II. Growth in overseas investment and a rise in China’s profile as a multinational investment source

Overseas investment by Chinese companies has been burgeoning over the last couple of years. According to Ministry of Commerce statistics, China’s annual overseas investment rose from 620 million dollars in 1999 to 5.5 billion dollars in 2004 and is expected to hit 6.8 billion dollars towards the end of 2005, with an impressive average annual growth of 49.1%. For a considerable period to come, China’s overseas investment will continue its robust rise; this is inevitable once a new period of development has been reached as a result of China’s economic development and opening up. This chapter will look into a number of major factors which have an impact upon the scale of Chinese overseas investment and will make predictions regarding China’s foreign investment scope during the 11th Five-Year Plan.

There are a host of factors which influence the scale of a country’s overseas investment. Considering the importance of economic indicators and ease in obtaining data, I choose eight indicators - four for calculations and four for reference purposes. The four indicators to be used in my calculations are: 1) the overseas investment growth rate;
2) gross export volume; 3) gross domestic fixed asset investment; and 4) GDP. The four reference indicators are: 1) domestic market competition; 2) foreign exchange reserves; 3) anticipated changes in the exchange rate; and 4) trade conflicts. I will also select a number of comparable large developing nations as reference for my analysis.v

Prognostication One: based upon the average annual growth rate for the previous five years. The growth rate of overseas investment during the previous period sheds some light upon future trends. China’s overseas investment grew at an average annual rate of 42.3%. Thus the nation’s volume of overseas investment will reach 30.1 billion dollars by 2010 and will total 83.8 billion dollars during the 11th Five-Year Plan, averaging 16.8 billion dollars per year.

Prognostication Two: based upon the scale of exports. The scale of overseas investment is relevant to a nation’s export capability. A large export scale is a sure sign that the product in question is popular with overseas consumers and that conditions are in place for the product to be produced where it is sold, rather than being imported from China. From 2001 to 2004, large developing countries registered an average ratio of 1.15% between gross FDI and total exports,vi while for China the ratio was 0.91%. In the January-December period of 2005, China’s exports amounted to 762 billion dollars, up by 28.4% from the previous year. It is estimated that they will grow by an average of 15% annually during the 11th Five-Year Plan and reach 1532.7 billion dollars in 2010. Calculated with the average ratio between gross FDI and total exports for large developing countries, overseas investment from China will amount to 17.6 billion dollars by 2010 and total 67.9 billion dollars during the entire five-year period, averaging 13.6 billion dollars per year.

Prognostication Three: based upon gross fixed capital formation. Countries that are strong in domestic investment tend to be strong in overseas investment. In 2001-2003, the proportion of overseas FDI in the gross domestic fixed capital formation averaged 1.54% for large developing countries. It was 1.02% for China.

The 11th Five-Year Plan is expected to register an average annual growth rate of 15% for China’s gross fixed capital formation. Measured against the average percentage of overseas FDI in the gross domestic fixed capital formation for large developing countries, China’s overseas investment will probably reach 27.4 billion dollars in 2010 and total 105.8 billion dollars during the 11th Five-Year Plan, with an annual averag e of 21.2 billion dollars.

Prognostication Four: based upon GDP. The larger the GDP, the greater the scope for domestic and overseas investment becomes. In 2001-2003, overseas investment constituted an average of 0.25 percent in GDP for large developing countries,vii whereas it accounted for 0.26% in China.

The official figure for China’s GDP in 2005 was 2225.7 billion dollars. Calculated by using the predicted average annual growth rate for the 11th Five-Year Plan of 8%, GDP will amount to 3270.3 billion dollars (at the constant 2005 Dollar-RMB exchange rate). Measured against the average ratio between overseas FDI and GDP for large developing countries, China will register 8.2 billion dollars in total overseas investment by 2010 and 35.3 billion dollars in total overseas investment during the 11th Five-Year Plan period.

For the results of my prognostications and their average values, see Table 6. In addition to the aforementioned calculable indicators, I have taken into consideration the four factors which cannot be calculated but which exert a striking impact and will cause China’s overseas investment to outstrip the average level of other large developing countries within the next few years.

Factor One: the pressure of competition upon the domestic market. A saturated market invariably leads to tougher competition and drives companies to look overseas for investment opportunities. Industrial overproduction is bound to quicken the pace of overseas investment.

Factor Two: a colossal foreign exchange reserve. China’s foreign exchange reserve hit 818.9 billion dollars towards the end of 2005 and is soon to overtake Japan to become the largest in the world. This large reserve provides the foreign exchange funds necessary for overseas investment.

Factor Three: anticipated changes in the exchange rate. Changes in the exchange rate affect companies’ overseas investment decisions. An appreciation of the RMB means higher export costs and lower overseas investment costs. These differentials are an incentive for companies to boost overseas investment.

Factor Four: escalating trade conflicts. Friction in trade is driving up export costs and destabilizing export prospects, meaning that the shift from export to investment has become an inevitable choice for many companies.

Based upon the above analyses, I am able to present the following forecasts.

China’s overseas investment is likely to average 15 billion dollars per year during the 11th Five-Year Plan, reach 20 billion dollars in 2010, and total upwards of 80 billion dollars during the entire period. A slowdown in the domestic economy could further aggravate the overproduction problem and result in continued RMB appreciation - which is likely to boost overseas investment.

By 2010, China will emerge as a major global FDI source and will be among three nations leading all the developing countries in terms of overseas investment.

III. Attracting non-FDI investment and multiple channels for incorporating advanced foreign technology

In our efforts to secure as much foreign investment as possible, we have learned to cope with the shrinking share of FDI in our gross fixed capital formation in many new ways.

(I) Additional forms of foreign investment

When FDI inflow slows down, China naturally turns to other forms of foreign investment. Companies have launched large-scale financing initiatives in overseas capital markets. As a result, the debit balance in negotiable securities investment, an item on the table of international revenue and expenditure, grew considerably, reaching 8.4 billion dollars in 2003 and 13.2 billion dollars in 2004. (See Table 7.) Another study puts the total volume of IPO financing in overseas markets of Chinese companies at 78.06 billion yuan in 2004, up 40.8% from 55.44 billion yuan the previous year, while the number of IPO companies grew by 75%.viii Moreover, according to the China Securities Supervision Committee, a total of 83 companies controlled by China had been listed in the Hong Kong stock exchange by the end of 2005 and raised a total of 49.7 billion dollars.ix These statistics prove that Chinese companies have developed an impressive overseas financing market.

In addition, foreign investors will make greater inroads into the Chinese securities market over the next few years. For example, they may enter this market as QFIIs (Qualified Foreign Institutional Investors). Statistics show that 34 foreign organizations had been granted QFII credentials towards the end of 2005, with the quotas approved totalling 5.65 billion dollars. These QFIIs held nearly 34.7 billion yuan’s worth of securities, accounting for 90% of their total assets. Having gained a favourable impression of the Chinese market, foreign financial organizations are scrambling for the much coveted QFII quotas. Many more foreign investors are expected to enter the Chinese capital market as QFIIs from now on.

(II) New channels for incorporating global production factors

FDI has long been a major tool in incorporating other production factors, technology in particular, from the outside world. However, numerous new methods have emerged in recent years to serve this purpose.

Firstly, reorganizing global production factors to set up businesses in China. Brand-new hi-tech firms have appeared in China in recent years. They possess capital, technology, human resources and markets that are all highly globalized, but their headquarters are in China rather than being mere subsidiaries of multinational corporations. One of them, the Vimicro International Corporation, invented Starlight I, the first production-ready multi-million gates digital imaging process chip in China. Vimicro is in the hands of a group of students who have returned to China after studying and working abroad, and more than 20 of them are accomplished software, multimedia and network technology experts who formerly worked for Intel, SUN, IBM HP, KODAK and other world-renowned companies. The Xinwei Company of Beijing, which established China’s own telecommunications criteria, SCDMA, was founded by Chen Wei and Xu Guanghan who come from Motorola’s semi-conductor division and the University of Texas in Austin respectively, and its team of researchers includes several Chinese students who have returned from abroad. The Semi-conductor Manufacturing International in Pudong, Shanghai, is the leader in chip manufacturing in China. Some of these firms are known as “foreign-invested enterprises”, but in reality they are strikingly different from the traditional sense of the term.

Secondly, obtaining technology and other production factors by means of overseas investment. Chinese companies are purchasing and acquiring businesses in foreign countries or setting up research and development centres overseas in order to acquire advanced technology. Ministry of Commerce statistics testify to the fact that Chinese enterprises are using transnational purchases and acquisitions as major stepping stones to overseas investment, their targets being foreign companies experiencing difficulties in management but which still possess good core assets - technology, brand names, and access to clients above all. In this way, many Chinese companies have acquired core technological capabilities and brand names which are recognized worldwide. By purchasing Germany’s DA Company, which ranked third out of global industrial sewing machine manufacturing industries and produced technology encompassing nearly all the hi-tech fields within this industry, the SGSB GROUP of Shanghai emerged as a world-class sewing equipment manufacturer. The Wanxiang Group of Zhejiang Province has acquired a number of companies in possession of core technology in the United States, Britain, Germany and Canada, thus gaining ownership of all their brand names, patents, clients and global market networks. There are also cases in which an “apprentice” buys out his “master”. After manufacturing products for Wohlenberg, a renowned German digitally-controlled machine tools company, for more than two decades, the Shanghai Mingjing Antiseptic Valve Company eventually bought Wohlenberg along with its patents, advanced expertise, brand names and access to clients.

China is regrouping production factors worldwide in other ways as well. Some Chinese companies, for example, hire high-calibre foreign experts for their technological development experience. Today, these experts are engaged in the development of core technology with a dozen digitally-controlled machine tools manufacturers in China. Another common practice is the commissioning of overseas manufacturers and foreign-invested companies in China to engage in OEM processing work using Chinese brand names. A large number of well-known Taiwanese and overseas manufacturers, for instance, are making laptop computers and mobile phones for Chinese brands.

(III) New methods involving purchases and acquisitions

After more than a decade of adopting primarily the “oasis investment” method, i.e., establishing new factories to absorb foreign capital and overseas investments, more and more Chinese companies are instead opting for outright purchases and mergers. Theoretically speaking, acquisitions and mergers require three basic conditions: 1) the domestic market of the host country is burdened by overproduction and fierce competition, leaving little room for newcomers; 2) the property rights market in the host country has matured to a certain level and sound legislation supporting purchases and mergers is in place; and 3) the company from the country of origin is competent enough to pull off such a purchase or acquisition. As things stand today, “oasis investment” takes place mainly in developing countries, while direct investment among developed countries largely takes the form of purchases or mergers. China’s growing reliance upon purchases and mergers as a form of overseas investment is a telltale sign that the Chinese internal and external environments for absorbing FDI and investing overseas have begun to change.

Foreign investors come to buy out enterprises with the aim of obtaining the retail sales networks, brand name impact, and access to local clients of these enterprises in mind - things that, unlike technology, they can neither take from the original company into China, nor develop in a short period of time. This is why some multinationals, especially latecomers without much of a market share or competitive edge in China, are inclined to use purchases and acquisitions to gain quick entry into China and expand market shares relatively quickly. In the monetary industry, multinational investors seem to be more in favour of purchases and mergers simply because of the overriding importance of readily available service networks and client resources to this industry. Considering these factors, it can be predicted that cases of purchases and mergers will steadily increase.

Chinese companies are likewise making great use of purchases and mergers as an effective form of overseas investment. According to Ministry of Commerce statistics, transnational purchases and mergers have become the principal approach of Chinese companies to overseas investment. In the January-November period of 2005, transnational purchases and mergers made up 54.7% of gross investment from China, mainly concentrated in telecommunications, automobile and resource development fields.

(IV) Outsourcing services so as to hasten the entry of the service industry into the global division of industry

Recent years have seen transnational investment worldwide gravitating towards the service industry. A comparison between 2001-2002 and 1989-1991 reveals that the proportion of FDI in services rose from 50.56% to 65.26% (UNCTAD, 2004). During these periods, China’s FDI inflow was mainly concentrated in the manufacturing industry; the service industry accounted for 22% of the total volume of FDI, whereas the figure was 65% for all countries and 71% for developed countries. (See Figure 5.)

Outsourcing has developed robustly over the past few years with regard to the global shift of the service industry. The term “outsourcing” refers to the practice in which manufacturers commission their services to overseas service-providers, a practice which has proved to be the fastest growing form of transnational shift of the service industry in recent years. According to a UNCTAD estimate, the outsourcing market for the service industry exceeded 350 billion dollars in 2005. The outsourcing of services is commonplace nowadays, particularly in commerce, computer data processing, the motion picture industry, cultural undertakings, the Internet, and various professional fields. The emergence of outsourced services as a major instrument in the ongoing global division of services is changing the nature of the service industry, which traditionally was regarded as unable to be traded. Since 2003, large multinational corporations have accelerated their shift of such services to China. Outsourcing services will become a major new aspect of foreign investment in China over the next few years.

(V) Changing relationships between foreign capital inflow, rights and interests, and employment opportunities

In the future, China will probably be confronted with a situation in which foreign investors can enhance their rights and interests and the impact of their brand names without bringing in investment. This may happen in two ways. Firstly, a foreign-invested company in China or a multinational corporation will buy out a Chinese enterprise not with money from their own country but through financing directly in China; secondly, multinational corporations in the service industry will enhance their presence in China not by increasing rights and interests but in such forms as licensing, management or cooperative agreements, contracts, BOT and BTO - forms that involve the use of foreign brand names without actual financial input.

Furthermore, the statistical relationship between foreign investment and employment will never be the same again. Certain services — such as research, development and design, data processing, backstage assistance, customer services, consultancy and brokerage - can create plenty of jobs even though they need only a small amount of foreign investment. In contrast, purchases and acquisitions in which corporate
rights and interests change hands without new companies being established are unlikely to generate new jobs. Changes in this aspect render obsolete the criteria for judging the significance of foreign investment absorption.

IV. Adapting to the new situation and increasing the level of openness to the outside world

The aforementioned changes in FDI inflow and outflow indicate that China’s participation in global competition and collaboration has entered a new stage, and that China has become a major host and source country in terms of transnational investment. The massive two-way flow of capital, technology and other production factors is deepening the mutual dependency and common development between China and the rest of the world and altering original relationships of rights and interests. The new situation calls for fresh analytical perspectives and strategic thinking when studying issues related to China’s opening up policy.

(I) It remains vital to continue procuring FDI

The significance of FDI procurement does not lie merely with the acquisition of capital. More importantly, it brings into China many important elements from abroad, including human resources, technological development and application capabilities, the ability to open up the international market, sources of clients, and management expertise. On no account should we jump to the conclusion that “we no longer need foreign investment” just because “the domestic market is no longer short of funds”. In a larger sense, the abundance or lack of funds does not sufficiently account for the global flow of FDI. Developed countries are receiving the lion’s share of FDI. The United States, for instance, enjoys the most abundant financial supply and invests more overseas than any other country, but meanwhile also receives a greater FDI inflow than anywhere else. (See Table 8.)

Companies possess different strengths in terms of resources in the market of a given product. They need to expand their strengths continually with the aid of all sorts of internal and external resources in order to prevail in the fiercely competitive market. They simply cannot afford to reject help from the outside world and let opportunities slip through their fingers, at least in certain stages of development and certain forms of competition.

FDI inflow has played a major positive role in the robust growth of the Chinese economy over the past twenty or so years. Today, globalization is further disintegrating the value chain, developments in information technology are involving more of the production, manufacturing and service sectors in the global division of industry, and more production factors are being distributed worldwide by means of FDI. This means increased opportunities to profit for all the partners in globalization. Meanwhile, competition between nations for foreign investment continues to intensify as countries seek to speed up their absorption of FDI.x Absorbing more FDI and putting it to better use remains the best long-term strategy.

(II) Improve the institutional environment and promote the effective use of domestic funds

The failure to put funds to full and effective use as stock capital has been a major problem in the Chinese economy in recent years and is attributable to the immaturity of the Chinese capital market. Stock investment often transcends time and takes a long while to yield economic returns. A direct financing system can grow quickly and healthily only within a trustworthy institutional system that protects the rights and interests of investors. Several studies have proved that countries with an underdeveloped financial system favour FDI procurement over domestic financing, which can often be baffling and costly (Wei Shangjin, 2006.) This problem may go from bad to worse if domestic companies diversify their use of foreign capital. A healthy domestic company is not only able to attract foreign investment at home - it can also utilize investment on foreign turf. It can absorb both FDI and non-FDI foreign capital. The domestic financial system and legislation must be improved to put domestic financial resources to full and effective use.

(III) Beware fluctuations and risks in cross-border capital flow

With its long-term prospects for economic returns and high withdrawal costs, the oasis style of investment in FDI is a stable and safe source of funds for the host country. Diverse approaches to foreign investment pose new problems and challenges in supervising foreign investment. With regard to FDI purchases and acquisitions, the main thrust of supervision is to prevent a monopoly;xi purchases and acquisitions in fields of major strategic importance call for particularly tight supervisory legislation and control. When absorbing non-FDI foreign capital, great attention should be paid to its impact upon the stability and safety of the country’s financial system, and supervision over short-term capital flow must be tightened up.

The robust growth of overseas investment raises tough questions regarding supervision. As most domestic companies lack experience in overseas investment, we must prevent them from rushing headlong into this field. Our domestic and global circumstances in this regard are somewhat similar to those of Japan in the 1970s-80s, when many Japanese companies invested whopping sums of money in mergers, acquisitions and construction, but few were successful and most suffered massive financial losses and bad debts. We must learn from the Japanese experience. To forestall irresponsible investment decisions and a drain of national assets, it is advisable to screen applications for overseas investment in each category over the next few years and to tighten up supervision over state-owned enterprises with flaws in their internal management.

(IV) Promote global trade and a more sound and open investment system

We have a long-term need for dual resources and markets. A global and open system of resources, capital, technology and products is in the best long-term interests of our country. We must give comprehensive consideration to the balance of interests between the nation’s status as a host country and as a source for international investment, between commodity circulation and production-factor flow, and between protection of domestic markets and promotion of open markets of foreign countries. We need to be more active and assertive in multilateral negotiations and to apply the rules governing multilateral relationships as an instrument for balancing the interests and rights of all partners, safeguarding and promoting worldwide free trade and investment, and fostering a good external environment for our medium- and long-term economic development.”

i “Gross fixed capital formation” is the conventional international term, but to facilitate international comparisons, this paper chooses the term “gross fixed capital investment.”

ii Both the State Statistical Bureau and Ministry of Commerce statistics put the volume of FDI utilized in China in 2005 at 60.3 billion dollars. However, this figure does not include utilization in banks, and the stock exchange. In the past, the volume of FDI used in these three fields was rather low, but in 2005, many banks brought in foreign strategic investors, causing a dramatic increase in the use of FDI in these fields, with foreign investors bringing in a total of 12.081 billion dollars. If this sum were included then the gross volume of FDI utilized in China would have reached 72.406 billion dollars, accounting for 6.7% of the gross fixed asset investment. However, this adjustment will not affect the conclusions of this analysis. The additional FDI scale was the result of a new round of bank regroupings and will not be sustained beyond the next few years.

iii 2004 saw 102 countries reform a total of 271 investment systems (235 of which were aimed at improving efforts to incorporate FDI), World Investment Report 2005 (simplified Chinese version). iv This impression is based on Xinhua website data.

v My definition of a “comparable large developing country”: any developing country with a per-capita average annual income of over 1000 dollars and a population of more than 3 million.

vi These statistics are cited from the UNCTAD online database, www. unctad.org.

vii See note 5.

viii Richlink International Capital, Beijing: 2004 Research Report on Overseas IPO of Chinese Companies, China Periodicals Network.

ix The 2005 figures are derived from the statistics released by the Securities Supervision Committee, January 25, 2006.

x For example, India’s appeals for foreign investors are rapidly growing. In December 2005, Intel announced a 1.1 billion dollar investment in India. Bill Gates has announced that Microsoft will invest 1.7 billion dollars within the next four years. The German automobile manufacturer, BMW, has signed an agreement with India involving an investment of 1 billion rupees (one dollar equals 26 rupees). Samsung, from the Republic of Korea, published a plan to build a mobile phone manufacturing factory in India costing 15 million dollars. These investments total approximately 6 billion dollars. In 2005, India acquired 8.91 billion dollars of foreign capital, nearly double the 2004 figure of 4.6 billion dollars.

xi Whether transnational mergers and purchases enhance or reduce the monopoly of the host country’s market remains a controversial theoretical issue, for in practice different cases point to different conclusions. During its formative stage, the theory regarding transnational investment maintains that one goal of transnational corporations in overseas investment is to control companies in different countries and overcome competition, and therefore, the essence of this type of investment is to expand the monopoly, resulting in reduced competition (Hymer, 1970, 1976). However, opponents to this theory believe that the entry of transnational corporations serves to intensify, rather than weaken, the market competitiveness of the host country because it helps to increase the number of companies in the host country and reduce the level of concentration of production and markets (Fishwick, 1981; UNCTAD, 1997). The consensus among most researchers is that, firstly, purchases and mergers are more likely than new companies to cause a monopoly, and secondly, it is more difficult to gain a monopoly in big countries than in small ones.

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[10] Hymer,S. H., 1970, “The Efficiency Contradictions of Multinational Corporations, American Economic Review”, Vol. 60, pp. 441-448.
[11] Ibid, 1976, “The International Operations of National Firms: A Study of Direct Investment”, Cambridge, Mass: MIT Press.
[12] Fishwick,F.,1981, “Multinational Companies and Economic Concentration in Europe”, Gower Publishing Company.
[13] Dunning,J.H.,ed.,1994,“United Nations Library on Transnational Corporations”, Vol. 18, The United Nations.
[14] Mehta Pradeep S., 1999, “Foreign Direct Investment, Merger and Strategic Alliances: Is Global Competition Policy Accelerating Development or Heading toward World Monopolies?”, UNCTAD Series on Issues in Competition Law and Policy, pp. 19-26.
[15] Zemplinerova, Alena and Martin, Jarolim, 2000, “FDI through M&A vs. Greenfield FDI: the Case of Czech Republic”, paper presented at the UNCTAD Seminar on FDI and Privatization in Central and Eastern Europe, Mimeo.
[16] UNCTAD, 1997, “World Investment Report 1997: Transnational Corporation, Market Structure and Competition Policy”, United Nations Publication.
[17] UNCTAD, 2004, “World Investment Report 2004: The Shift towards Services”, United Nations Publication.
[18] UNCTAD, 2002, “World Investment Report 2002: Transnational Corporations and Export Competitiveness”, United Nations Publication.