Searching for FDI Stability

Searching for FDI Stability

China now faces a sharp decline of foreign direct investment (FDI). What are the reasons for the drop, and how should China promote steady FDI growth? Huo Jianguo, President of the Chinese Academy of International Trade and Economic Cooperation, shared his views in an article for Securities Daily. Edited excerpts follow:

Since China adopted its reform and opening-up policy in the late 1970s, foreign investment has played an active role in promoting China’s economic development. However, according to figures from the Ministry of Commerce (MOFCOM), in the first four months this year, the number of newly established foreign-invested enterprises was 7,016, a year-on-year decline of almost 14 percent. The paid-in capital totaled $37.88 billion, dropping 2.38 percent from a year ago. In fact, since November 2011, the paid-in capital has been decreasing, imposing new pressure on China’s economic and trade growth and causing market worries about China’s environment of utilizing foreign investment. Though the decline of FDI is closely related to the downturn of the global economy, the problems behind the phenomenon still need careful analysis and should be properly handled.

Reasons for the drop

The FDI slowdown in the global market is the direct reason causing the drop of paidin capital in China. A report released by the United Nations Conference on Trade and Development said in 2012 the total global foreign investment is expected to reach $1.6 trillion, slightly higher than last year’s $1.5 trillion. This indicates that the weak global economy, especially economic recession in developed countries, has curbed the global scale of direct investment. Direct investment in the global market will remain downturn in the short run.

Advantages in China’s eastern region are weakening, leading to a decline of the use of foreign investment. Of the total foreign investment China has attracted, 85 percent goes to the eastern region. In recent years, due to restrictions on resources and rising prices for raw materials and labor in this region, the proft rates for foreign investors dropped and investment returns lowered. Therefore some foreign investors are no longer willing to make or increase investment in the eastern region. Moreover, since the existing volume of FDI in the eastern region is already quite large, it is unlikely for the FDI to maintain high growth under the background of a global economic slowdown.

China is also readjusting its policies of utilizing foreign investment. Since 2000, as the Chinese economy developed and the exportoriented economy took center stage, China has adopted active and effective measures to improve the quality of utilizing foreign investment. Focus of the policy has been transferred from extensive expansion of the amount of foreign investment to the quality and benefits of utilizing foreign investment. Therefore, the decline of the amount of paid-in capital shows that the policy readjustment has worked, and the structure and quality of foreign investment are being improved.

Breakthroughs come slowly in expanding the sectors accepting foreign investment. In 2010 China decided to expand the sectors for foreign investment, but it is not yet clear which sectors are included. Particularly, there are obstructions in introducing foreign investment to some monopoly industries. Problems of national treatment in some sectors, especially hi-tech industries and research and development of new products, frustrate enthusiasm of foreign investors.

Necessary growth

At present the global economy is in a key stage of all-out transformation, readjustment and reform. To reduce the infuence of transformation of the global economic structure on the Chinese economy, we should make full play of the role of foreign investment in upgrading industrial structure and transforming the economic growth pattern.

To maintain steady growth of FDI is a must for China to implement the policy of reform and opening up. Since the mid and late 1980s, China has adopted various measures to stimulate FDI. Foreign investment has made signifcant contributions to China’s economic development. Foreign-invested enterprises contributed 35 percent of China’s industrial output value and more than 20 percent of the country’s tax revenue, and created 30 million job opportunities. This is not only an achievement of China’s reform and opening up, but also an important pivot for advancing reform and opening up. Hence, to maintain steady growth of FDI helps to consolidate the achievements of reform and opening up. While expanding the scale of FDI, China must attach importance to introducing foreign investment to service sector and strategic emerging industries.

Maintaining the steady growth of FDI is necessary to ensure China’s economic development. Since China introduced reform and opening up, the capital and technologies brought by foreign investors have greatly pushed forward its industrialization process and made it the “workshop of the world.”At present, the industrialization level in China’s western region is still far behind that in the eastern region. Therefore China still needs foreign investment to push forward the industrialization process and improve the productivity in the region. It is necessary for the country to continue introduction of FDI so as to further enhance its manufacturingcapability and give it a competitive advantage in staying the “workshop of the world.” In the history of world economic development, Britain, the United States, Japan and Germany have all experienced the process of being a workshop of the world or a manufacturing center before forming their respective strong industries and infuences.

AttRACtiNg iNVEStMENt: the intel Dalian plant, one of the most advanced intel manufacturing facilities. intel has a total investment of $4 billion in China

Steady FDI growth is closely related to steady foreign trade growth. Foreign investment has driven China’s foreign trade development. In the near future, ensuring economic growth and restructuring will be a significant task for China’s foreign trade. However, when the global economy weakens and demand from the international market shrinks, if foreign investment continues declining, it will be hard for China to achieve the goal of maintaining steady growth of foreign trade, and will decrease job opportunities.

Four measures

Today, the per-capita FDI attracted by China is only $50, much lower than the world average of $110 and $534 in some developed countries. Therefore China still needs to maintain the steady growth of FDI. In the coming decade, China will not change the strategy of actively and effectively utilizing foreign investment. At present, China needs to adopt some measures to keep steady FDI growth.

First, a sound environment that can facilitate the development of foreign investment must be created. China should improve relevant laws and regulations and further strengthen its protection of intellectual property rights. By introducing a competition mechanism, China should further regulate market behavior and promote the reform of monopoly industries. In the meantime, the Chinese Government should provide full information to foreign investors and create a favorable environment to encourage investment.

Second, efforts should be made to guide the fow of foreign investment. Due to the uneven development between the eastern region and the central and western regions, China needs to adopt different policies in promoting foreign investment. To the eastern region, foreign investment should be encouraged to service industries, which calls for expanded opening of such sectors as fnance, securities and insurance. To the central and western regions, foreign investment is still welcomed to the manufacturing sector, and market access to middle and high-end manufacturing industries should be properly relaxed. The central and western regions are also encouraged to establish bases to accommodate industrial transfer from the eastern region.

Third, the soft environment for investment should be further improved. At present, there are still disputes on whether foreign investment in certain sectors should be encouraged. Hence, consensus should be reached to ensure the steady growth of FDI. Further, China should highly stress improving the soft environment for investment, such as bettering services facilitating investors, promoting government function transformation and improving investment facilities, in order to create a sound and fair competition environment for foreign investors.

Fourth, formulation of new policies to attract foreign investment should be accelerated. The new policies include those to encourage investment in emerging industries, energysaving and environment protection industries, modern service industries, modern agriculture and other sectors that conform to transformation of the country’s economic growth pattern. Efforts should be made to accelerate research on the opening of strategic emerging industries to foreign investment and promote international cooperation in these industries. China should also further open key industries and the machinery manufacturing industry to foreign investors that participate in mergers and acquisitions. Problems related to national treatment should be solved so that foreign investors can enjoy the same favorable policies as domestic companies in technology innovation and in research and development.

As all developing countries are strengthening efforts in attracting foreign investment, China faces ferce international competition in this regard. We must adopt decisive measures to promote introduction of foreign investment and combine the use of foreign investment with the transformation of our economic growth pattern and improvement of industrial competitiveness.

yushujun@bjreview.com