FDI in China
The Hinrich Foundation is pleased to announce the publication of a new book by Michael J. Enright that analyses the impact on China’s economic development of foreign direct investment. For the first time, using Economic Impact Analysis and econometric modelling, the book estimates that the impact of foreign investment is far larger than is generally understood, and that most multinational companies vastly underestimate their own impact on China’s economy.
In 2015, Hinrich Foundation engaged Enright, Scott and Associates led by Prof Michael J. Enright to undertake a major research effort to identify the impacts of FDI in China. It is generally acknowledged (although less by China these days) that the economic development of China owes some of its success to the foreign direct investors who developed industries in China over the last 30 years. This project set out to measure the actual impact that FDI has had (and continues to have) on China. The project produced a number of comprehensive research reports which are shared here:
FDI in China literature review
There is an extensive academic literature on the impact of foreign investment on China’s economy. This literature differs greatly from work that compiles and reports statistical data on the amounts of foreign direct investment in China. It differs substantially from the individual company stories, anecdotes, and case studies found in the business press. It also differs considerably from the surveys of foreign companies that focus on the opportunities and challenges faced by foreign firms operating in China. This literature is important in that it tends to shape much of the discussion and debate about foreign investment that goes on in policy circles in China and in influential think tanks around the world. In addition, a number of the people who write in this area are likely to be called upon by government as advisors. Thus it is crucial for anyone interested in the impact of FDI in China, or interested in the types of analysis and discussion that can influence policy toward foreign investment behind the scenes in China, to understand this literature. It is also vitally important that foreign governments, think tanks, and companies that are interested in China or operate in China understand this literature in order to understand Chinese approaches and policies toward foreign direct investment and how these might evolve in the future.
FDI in China policy summary
This document briefly summarizes the evolution of China’s policies toward foreign investment into the country. It then traces the history of inward investment into China by compiling a variety of statistics concerning foreign direct investment in China, the importance of foreign investment to capital formation and trade in China, and breakdowns of foreign direct investment in China by origin, industry, province, and city. The document then reports a unique analysis of the impact of foreign investment on China’s economy, and end with a set of conclusions summarizing the earlier sections of the document.
FDI in China Economic results
In this document, we undertake a series of econometric tests of the influence of foreign investment on various aspects of China’s economy. The goal is two-fold. First, to perform similar tests as have been found in the academic literature on the impact of foreign direct investment in China in order to see if those results stand up to changes in the variables employed, the specific formulations used, and the time periods studied, or whether the published results are in some ways dependent on the specifics of the variables employed, formulations used, and time periods studied. Second, we test our own formulations of relationships between foreign investment and key aspects of China’s economy in order to add perspectives to the existing literature. The main reasons for these approaches is that the econometric literature on the impact of FDI in China can be influential in terms of policy making within China, and that there are some contradictory and counter-intuitive results in the existing literature that have been described in the literature review for another Phase of the current project.
Corporate case studies provide a range of insights into the roles played by foreign companies in China. The following case study is an excerpt from “Developing China: The Remarkable Impact of Foreign Direct Investment”. It details the contribution of Hong Kong companies to China through FDI, and shows how these companies have been pioneers in many if not most aspects of China’s economic opening. The case study includes the following key findings:
- Hong Kong has been the largest single source of foreign investment into the Chinese Mainland. From 1985 to 2014, Hong Kong was the source of USD 744.8 billion in foreign direct investment, or 47 percent of all of the FDI into the Chinese Mainland, according to Chinese statistics.
- Hong Kong companies have been pioneers in many aspects of China’s development and particularly its interaction with the rest of the world. Hong Kong companies helped develop the supply chains and production systems that made China one of the world’s leading manufacturing and export locations. They were also early investors in the infrastructure that helped link China to the global economy.
- While the relative importance of Hong Kong investors has diminished over the years, they still make vital contributions to China.
Corporate case studies provide a range of insights into the roles played by foreign companies in China. The following case study is an excerpt from “Developing China: The Remarkable Impact of Foreign Direct Investment”. The Maersk case shows how valuable it has been for China to connect to world markets and how extensive the resulting impact of the foreign companies that facilitate this process can be. The case study includes the following key findings:
- Through its investments in ports and its shipping operations, Maersk has been a leader in connecting China to the rest of the world and in facilitating China’s emergence as the world’s leading trading nation.
- The total cumulative impact of Maersk’s direct investment (including the direct, indirect, and induced impacts) is estimated at USD 21.5 billion in output, USD 6.7 billion in value added and over 991,000 in employment. The impact of its procurement is estimated at USD 25.8 billion in output, USD 7.9 billion in value added and 1.125 million in employment.
- Beyond the numbers, Maersk has also contributed to China by assisting Chinese suppliers, improving efficiency in ports and logistics, reducing costs, and improving environmental practices.
Corporate case studies provide a range of insights into the roles played by foreign companies in China. The following case study is an excerpt from “Developing China: The Remarkable Impact of Foreign Direct Investment”. It describes P&G’s 30-year contribution to China through FDI. The case study includes the following key findings:
- The impact of P&G’s investments and operations on China’s economy has been several times its investment and sales totals.
- In 2014 alone, the impact from the P&G system of retailers and distributors in China can be estimated to have reached USD 11.28 billion in value added and over 612,000 in employment.
- Beyond the numbers, P&G has also contributed to China by introducing new product categories, building supply chains and distribution channels, advancing marketing and advertising capabilities, developing corporate social responsibility programs and training generations of Chinese staff and executives.
Corporate case studies provide a range of insights into the roles played by foreign companies in China. The following case study is an excerpt from “Developing China: The Remarkable Impact of Foreign Direct Investment”. It describes Samsung’s contribution to China through FDI. The case study includes the following key findings:
- Samsung has been one of the largest foreign investors in China. It has invested extensively in production facilities, research and development, and marketing and sales in China.
- Samsung has also invested extensively to build capabilities in its own Chinese workforce and has localized the vast majority of key management and research positions in China. In 2014, China was responsible for 25 percent of Samsung Electronics total workforce –a total of 60,000 individuals– with the average employee numbers having grown 14 percent per annum since 2010.
- Samsung has contributed to the development of China’s electronic manufacturing base by engaging not just in electronics assembly in China, but also in advanced componentry, extensive research and development in China, and bringing much of its most advanced technology to China.
This four-page infographic highlights a number of the key data points from “Developing China: The Remarkable Impact of Foreign Direct Investment”, including FDI impact on China’s GDP and employment, as well as some of China’s major cities and industries. It also describes key benefits of foreign investment that are often difficult to quantify. The infographic is now available in English and Chinese.
FDI in China Fact sheet
This one-page fact sheet provides a brief overview of the key findings from “Developing China: The Remarkable Impact of Foreign Direct Investment”. It explains the economic impact of foreign investment on China’s economy and describes the specific result of foreign investment on individual Chinese cities. The fact sheet is now available in English and Chinese.
In addition to the book “Developing China: The Remarkable Impact of Foreign Direct Investment,” the Hinrich Foundation commissioned a multi-month investigation of the impact of US foreign investment and US companies on China’s economy. The investigation resulted in a white paper report titled “The Impact of U.S. Foreign Investment and U.S. Companies on China’s Economy” by Michael J. Enright. The new data uncovered in this ground-breaking research suggests the economic impact of US FDI in China may be far greater than previously estimated.
White paper report
China’s economic reforms have created the world’s most dynamic economy. A major part of China’s economic development has involved foreign companies, and in particular companies from the United States. This white paper summarizes the results of a project sponsored by the Hinrich Foundation and undertaken by Enright, Scott and Associates (ESA) on the impact of US investment and US companies on China’s economic growth and employment.
Among the papers conclusions:
- Official US Foreign Direct Investment (USFDI) numbers are likely to be substantially understated because they do not capture all investments made through third countries or economies.
- Economic impact analysis gives a much more complete picture of the benefits of foreign enterprises than foreign direct investment (FDI) flows. The economic impact of US Foreign Affiliates (USFAs) in China in a given year has been as much as 180 times the investment flow. This is where the discussion about the impact of US companies in China should start, with the economic impact estimates, not with the USFDI figures.
- China benefits far more than US companies from their presence in China, since the GDP impact of US companies, suppliers, distributors, and the relevant employees in China in a given year is on the order of 11 times their net income.
- The economic impact analysis tools can be used in other countries to provide a more complete picture of the benefits of FDI and foreign companies.
Expanded white paper report
The expanded version of the above white paper report contains more historical context and statistical information. It provides an overview of the evolution of US direct investment in China, including insight into initial US-China commercial interactions and US foreign investment in the New China. It also describes in detail the methodology behind the economic impact analysis used for this report. Finally, the expanded white paper report provides a number of additional charts and graphs illustrating the impact of US foreign direct investment on China’s economy over the years.
US FDI in China Fact sheet
This one-page fact sheet combines key findings from the white paper report on US FDI in China with key findings from “Developing China: The Remarkable Impact of Foreign Direct Investment”. It includes data on FDI inflows and the economic impact of foreign investment on China’s GDP and employment. It also describes additional impacts of foreign investment that are often difficult to quantify and provides analysis on implications moving forward.
Li Gang, Vice President, Chinese Academy of International Trade and Economic Cooperation, MOFCOM
Xu Jiyuan, Director, Economic Development Division of the Institute of World Economics and Politics, Chinese Academy of Social Sciences
Jia Jinjing, Director, Macro Research Department at Chongyang Institute for Financial Studies, Renmin University of China