Foreign direct investment (FDI) is a long-term investment by a foreign investor and is considered a key component of national development strategies across all countries over the globe. This type of investment boosts the economic growth of a country through its positive impact on the country’s domestic capital, productivity, and employment statistics. FDI is the lifeblood of a growing economy that provides the host country benefits of increased labor standards and skills, transfer of new technology and innovative ideas, improved infrastructure and conducive business environment.
It is a leading source of external financing. Countries that have stable market conditions coupled with high productivity, low costs of labor, effective government policies and adequate infrastructure facilities are considered to be the most favored destinations for foreign investment companies. Liberalization of economies has opened doors for many countries into the emerging markets of the developing nations such as China and India. The Chinese Economy The Chinese economy is one of the fastest growing economies in the world.
It has emerged from being an economy with virtually no foreign investment in the late 1970s to a country that attracts one of the largest amounts of foreign investment from investors across the globe. The increasing openness of the Chinese economy to foreign direct investment has contributed immensely to its exceptional growth and development. The increase in foreign direct investment in China has contributed to higher investment, and growth in productivity, greater employment opportunities, and a dynamic export sector. China is one of the most populous countries in the world with more than 1.
3 billion people with an annual growth rate of 0. 8%. It has taken adequate measures to curb its rising population figures and this has made a positive impact on its growth rate. The population density is approximately 136 persons per square kilometer with most of the people (almost 60 percent) living in rural areas. Life expectancy is also higher in this country than most developing nations across the globe. The country also has high literacy rate of 91 percent. The Chinese economy witnessed a slow but dramatic growth over the past twenty years.
It has transformed from a poor economy with relatively low per capita income to the world’s fastest growing economy. The Chinese economy has emerged as a market-oriented economy that has become a dominant figure in world trade. The country has increased its interaction with international economy that has resulted in increased foreign trade and gross national product (GNP). The Chinese economy grew at 11. 4 percent in the year 2007. As per the FDI Confidence Index compiled by A. T. Kearney in the year 2005, China hold the first position followed by India and United States.
China is currently the world’s fourth largest economy and it has expanded by at least 10 percent annually in the last four years. Foreign direct investment in China rose by 4. 5 percent in the year 2006 to approximately US$ 63 billion. The country’s foreign currency reserves are the world’s largest and primarily derived from the trade surplus that rose to almost US$ 177. 5 billion in the year 2006. FDI investment trend in the past 10 years Foreign direct investment sector in China has spelled success over the past ten years.
It has increased from a mere US$ 19 billion in the year 1990 to more than US$ 700 billion in the year 2007. A glance at the capital and financial account item’s surplus in the past few years reveal that the foreign direct investment has made great contributions to the foreign exchange reserve accumulation. Besides this the FDI has a stabilizing influence on the country’s economy. This is largely due to the long-term commitment that FDI stands for while establishing foreign affiliates. Most developing countries hence are adopting policy reforms to attract more foreign investment into the country.
China has accounted for more than one-third of the gross FDI flows to all emerging markets over the past decade. Despite the weakening of the global markets in the recent years, China has remained an essentially fast growing economy. The country’s capital inflows have been dominated by FDI that has made significant contribution to stabilizing the economy along with other associated benefits such as technological transfers and increasing managerial expertise. In 2007 the overall FDI inflows into China totaled US$ 82. 7 billion that is a 13. 8 percent increase from the previous year figures.
The total number of deals dropped by almost 8 percent in the year 2006 from 44,019 in the year 2005 to 41,485 in the 2006. The increasing appreciation of the local currency renminbi during the period and the subsequent impact on the market was responsible for this drop. The year 2007 saw only 37,888 foreign investment deals, a drop of 8. 7 percent from the previous year figures. But the value of the FDI was significantly larger than the previous statistics. Wholly foreign-owned enterprises represented almost 78 percent of all foreign investments followed by equity joint ventures and contractual joint ventures.
Continuous foreign capital inflow has rendered the Chinese economy the prime position in global context in terms of attracting foreign investment. The country accounts for an investment of foreign capital funds totaling US$ 8589 million by 5136 new foreign corporations between the period January to February 2006. The major sources of FDI in China are Hong Kong, British Virgin Islands, South Korea, Japan, and Singapore. Among other investors the prominent countries are United States, Taiwan, Cayman Islands, Western Samoa, and Mauritius. These top ten countries together account for 87. 2 percent of total FDI inflows into China.
The manufacturing sector accounted for nearly 57. 7 percent totaling US$ 40. 1 billion of the total FDI inflows in the year 2006 followed by 11. 9 percent equivalent to US$ 8. 2 billion in the real estate sector. Other prominent sectors that reflect increasing foreign investment are leasing and business services (US$ 4. 2 billion), transport (US$ 2. 0 billion), wholesale and retailing (US$ 1. 8 billion). Low cost of manufacturing, increasingly wealthy consumer market comprising of 1. 3 billion people are attracting larger number of foreign companies to establish their outlets in China.
The large-scale investment by foreign investors has helped in pushing the nation’s foreign currency reserves to almost US$ 1. 2 trillion that is quite high by global standards. The FDI outflow of China received significant attention in the year 2007 due to the creation of People’s Republic of China’s sovereign wealth fund, the China Investment Corp. and several other high profile investments and acquisitions. China Investment Corp. purchased a stake of US$ 3 billion in Blackstone and 9. 9 percent stake of Morgan Stanley worth US$ 5 billion in the year 2006.
The statistics of the total FDI outflow in the year 2006 reveal a total figure of US$ 21. 2 billion that is an increase of nearly 73 percent over the previous year figures. The State owned enterprises accounted for almost 86 percent of this total FDI outflow. The FDI outflow in the country is spread across 172 destinations across the world. The largest share of the FDI outflow from China is received by Latin America followed by Asia, Cayman Islands, and Hong Kong. The prime regional sources of China’s overseas investments are Guangdong, Shanghai, Shandong, Jiangsu, Fujian, Hainan, Hebei, and Beijing.
Balance of Payments trend in the past 10 years Over the last ten years China’s Balance of Payments (BOP) kept its current and capital accounts in surplus constantly. The annual total scale of BOP accounts’ increased by 31. 6 percent during the period 1984 – 2004 when foreign reserves increased from US$ 0. 054 trillion to US$ 1. 91. In the first half of the year 2005, the BOP raised to US$ 1. 14 trillion that is an increase of 25. 3 percent over the previous year figures. There is a complimentary relationship between the growth of FDI and international trades.
The trades and foreign investment have immense impact on the position of balance of payment, in terms of growth in international business activities. Source: International Financial Statistics July 2007, International Monetary Fund The changes in economic policies adopted and implemented by the Chinese government have made tremendous impact on its trade and balance of payments. The opening of the economy and its gradual move towards a market-oriented economy has made significant impact on the trade balances and foreign funds inflow into the country.
A look at the balance of payments figures indicates that the current account surpluses and foreign direct investment have remained important contributors to accumulation of foreign exchange reserves in China. The trade surplus widened to over 177 billion dollars in 2006 to 262 billion dollars in the year 2007. The Government of China is planning to stimulate imports and streamline exports in the coming years. GDP and Inflation Trend in China GDP has shown a healthy growth trend over the past decade in China. Individuals have become richer with annual GDP rising from US$ 8,440 billion in the year 1998 to US$ 24,661 billion in the year 2007.
The real GDP growth in the year 2007 was 11. 4 percent raised from 11. 1 percent in the year 2006. The 11. 4 percent GDP growth rate is the highest for China in the last 13 years and it is expected that the GDP will grow 10 percent in the forthcoming year. The economic growth in China was expected to slow down in the year 2007 due to the global market slump. However the rising oil prices across the globe has not made much of an impact so far on the Chinese economy due to the huge amounts of foreign investment in the country. But Chinese economy being more dependent on international trade will face a slow down eventually.
Economists predict that the rising consumption pattern will have a slow down impact on the GDP growth rate in the year 2008. It is expected that the Chinese exports will slow down from 26 percent in the year 2007 to 19 percent in 2008. This is mainly accountable to the weakening global market demand and cuts in export rebates. A look at the inflation in China reveals a steadily growing curve. Inflation reached a high of 4. 8 percent in the year 2007 from 1. 5 percent in the year 2006. The rising inflation has reached the peak within the decade.
It is expected that the inflation will continue to rise in the forthcoming years with percentage rising to more than 7 in the year 2008. The rising global price of oil has made significant impact on the market prices of goods and commodities in China. This has led to rising consumer oil prices and food prices, and producer price index. Inflation has spread to the service sector as well indicating rising cost of labor in the country. The consumer price index rose by 4. 5 percent in the urban areas and by 5. 4 percent in the rural areas in the year 2007.
The rise in inflation is mainly attributed to increased food prices and housing sector. This is becoming a matter of concern for the Chinese economy since the escalating prices can have a negative impact on the overall economic growth. The Chinese government is trying to control inflation adopting strict monetary and trade regulations. Unemployment trend The per capita disposable income was 13,786 yuan in the year 2007 that is a growth of 17. 2 percent from over the previous year figure of 11,759 yuan. The rural per capita disposable income was 4140 yuan in the year 2007 that is a growth of almost 15.
4 percent over the previous year figure of 3587 yuan. The employment figures also raised in the past few years steadily both in the urban and rural sectors. The number of employed people in urban areas reached 12. 04 million people in the year 2007 an increase of 200,000 people over the previous year statistics. China has generated almost 51 million jobs in the past five years in the urban areas. Statistics reveal that there are about 20 million new job seekers in the country every year and the economy is able to provide approximately 12 million jobs per year.
Government efforts are directed towards generating more jobs. The country has implemented active employment policies since the year 2002 that has increased the number of employed people from 8. 4 million to 12. 04 million in the last year. Impact of FDI on the Chinese Economy The past few years has witnessed the emerging of China’s economy as the most successful in the world utilizing the inflow of foreign direct investment towards its economic development. The key driving force towards this economic mobilization is the opening up of the Chinese economy to foreign trade and investment.
The opening of the economy with subsequent rise in foreign direct investment has contributed immensely to its exceptional growth and development. The foreign direct investment has made a positive impact on the country’s balance of payments. Besides this the impact has been favorable on the country’s GDP growth rate. It has not only raised GDP growth by adding to capital formation but also has contributed to higher GDP growth through its effect on total productivity. The establishment of foreign funded enterprises has directly contributed to the GDP growth an introduction of new technologies and management skills.
The growth in industrial establishments and service sector has created new employment opportunities and this is seen as a significant contributor to economic development in China. Moreover, the foreign direct investment has assisted in establishing a highly competitive manufacturing sector in the country. This has contributed immensely to the rising exports and the country’s participation in world trade. References: 1. Foreign Direct Investment in China: International Monetary Fund, 2002 – http://www. imf. org/external/pubs/ft/pdp/2002/pdp03. pdf – accessed on 9th April, 2008 2.
The US-China Business Council – Forecast 2008 China’s Economy – http://uschina. org/public/documents/2008/02/2008-china-economy. pdf – accessed on 9th April, 2008 3. ADB: China’s GDP to grow 10% in 08, inflation at 5. 5% – http://www. chinadaily. com. cn/china/2008-04/02/content_6587641. htm – accessed on 9th April, 2008 4. Chinese Inflation hits highest level in more than a decade, Feb 20, 2008 – http://www. iht. com/articles/2008/02/19/business/yuan. php – accessed on 9th April, 2008 5. National Bureau of Statistics of China – http://www. stats. gov. cn/english/statisticaldata/yearlydata/ – accessed on 9th April, 2008