Why FDI Falling Down?

Domestic reasons

“Two factors have contributed to the continuous negative growth of FDI”， said Shen Danyang， spokesman of the Ministry of Commerce， at a routine press conference on May 15. One the one hand， the growth of the world economy has become sluggish， exerting heavy impacts on the global FDI. According to a report issued by the trade and development council of the UN， the scale of Greenfield investment and transnational MA have become dropped during the first quarter this year， lowering global expectations about the FDI prospects. On the other hand， the U.S. and European countries have encouraged the return of industries and some developing countries have adopted more favorable investment inviting policies， increasing the FDI competitions.

If we explore further by industry， the manufacturing industry in absorbing FDI in April experienced the largest drop， down by 4.4%， according to Ministry of Commerce. Also， the FDI of service industry and agricultural， forest， husbandry and fishing industry have dropped by 3.1% and 0.9% respectively. If we look at the data by region， the FDI of China’s west region and east region have dropped by 15.2% and 2.5% respectively.

To compound the situation， the rising of factor costs of China have weakened its advantages in operational costs. Bai Ming， deputy director of the international market research department of the Ministry of Commerce， said that “besides the European debt crisis and other negative external factors， the Chinese economic adjustment has also lowered the investment willingness.” According to up-to-date data provided by the National Bureau of Statistics， the PPI (Producer Price Index) has dropped by 0.7% on a year-on-year basis， showing the economic slump to the bottom.

Also， the structure and quality of FDI， rather than its pure scale， have been given more and more attention. “In many regions it is not about inviting foreign investment， but selecting the right investment， which may also impact the scale of foreign investments，” Shen said.

Li Zhongzhou， a WTO expert， remarked that besides the above-mentioned reasons， the control and management of domestic real estate market have constitute another important reason for the shrinking FDI. Data shows that the real estate industry has accounted for 25% in terms of paid-in foreign investment， while the control of the real estate market has lowered the paid-investment of real estate market for the first quarter by 6.3%.

Teng Tai， chief economist of Minsheng Securities， said that the quality has replaced scale as the most calculated factor in attracting FDI. The Chinese people have paid more attention to the production and management technology when inviting the foreign investment， while some foreign companies are unwilling to see the technological transfer， which will lower the amount of investment. Also， the competitive advantage in labor costs， less favorable FDI policies， and a more intense focus on environmental protection in China have pushed the adjustment of foreign investment structure， during which the FDI scale will naturally.

External reasons

According to Xinhuanet.com， the re-cent “Global Investment Trends Monitor” issued by the UNCTAD (United Nations Conference on Trade And Development) on April 12， the global FDI in 2011 amounts to 1.66 trillion USD， up by 16% on a year-on-year basis， but still 25% less than the peak of 2007. Also the FDI condition has improved this year; investors are still cautious facing the fragile world economy.

It shall be noticed that the gloomy European economy has delivered huge impacts on its investment in China. Data shows that during January to April the investment from 27 European countries has greatly dropped， with paid-in investment shrinking to 1.9 billion USD， down by 27.9% yearon-year， again leading to the negative growth of China’s FDI. “Because of the impacts from European debt crisis， the investment from the European Union to China has been falling down. Also， the bilateral exports and economic relations between China and the European Union have also turned gloomy under such a background.” said Shen.

“The fragile recovery of the world economy has made the pie of world FDI much smaller， while the European Union and U.S. are encouraging the return of industries， and emerging countries including BRIC have promoted more favorable investment policies， splitting the stream of international capital.” said He Manqing， director of the Transnational Corporation Research Center of the Ministry of Commerce. She added that China is placing more focus on the quality and efficiency of investment because of the rising labor costs and restraints by environmental protections.

Bian Weihong， senior analyst of the International Finance Research Institute of the Bank of China， commented that as the largest trading partner of China， the EU is suffering a serious debt crisis with negative growth for 2 quarters. The recession of the European economy has lowered the local willingness to invest in China. Also， the U.S. growth rate for the first quarter is lower than expected， and the recent economic data also turns negative. These factors combined have contributed to the negative growth of China’s FDI.

Zhou Yu， director of the international financial currency research institute， Shanghai Academy of Social Sciences， said that the economic meltdown of the U.S. and EU have made their companies unable to expand financially， leading to the decrease of FDI scale. Most companies have to adjust their investment according to demands， but facing the unclear economic prospects， most companies will choose slowing down the investment and decrease the scale.

Cheng Dawei， chief expert of WTO affairs center in Beijing， told reporter that “the current domestic economic condition will make the investment slowdown continue，”she mentioned that this is mainly about the pressure from the world economic environment: the EU debt crisis has no appropriate solution， and the investment ability of European companies is decreasing. The policies adopted by the U.S. government to encourage the reflux of capital show that the U.S. economic recovery is not as rosy as the report describes. Besides， emerging countries are promoting more favorable policies to attract foreign capital， causing split of the international capital.