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After topping the world list in 2002, the actual foreign direct investment (FDI) flowing into China in 2003 reached US$57 billion, a figure surpassed only by that of the United States.
While countries in the developed world are not overly concerned about this, many developing countries are deeply worried.
To countries like India, Malaysia, the Republic of Korea, and even Mexico, Brazil, the Czech Republic, Poland and Hungary, China is a formidable rival in the race to attract more FDI. Many observers think that China has clearly been drawing investment away from its neighbors and even from countries in Latin America and Central and Eastern Europe (CEE). China's share of inflowing FDI globally skyrocketed from 0.1 percent in 1980 to 1.7 percent in 1990 and 8.3 percent in 2002.
It is true that China has garnered a major share of global FDI, but has it achieved this at the expense of other countries?
Despite the number of people who hold this view, little evidence can be found that China has secured its position by compromising its fellow developing countries. China gained its geographical advantage by diversifying source countries while effectively attracting the investment of overseas Chinese.
China has succeeded in tapping the resources of Chinese people around the world but has also reduced its reliance on them over the years. At the beginning of the 1990s, Hong Kong, Macao and Taiwan accounted for about two-thirds of China's inflowing FDI. Their share has declined to 40-45 percent in recent years.
For the FDI originating from Hong Kong, round tripping was once a phenomenon in the 1990s. It is estimated that the round tripping capital made up from 15 to 40 percent of the total inflows. Thus, we can conclude that the most important source of FDI in China has been overseas Chinese, and even the Chinese in the mainland themselves.
China has also attracted FDI from Japan, the United States, the European Union and other economies that do not have large numbers of overseas Chinese, but has not grabbed its rising share by undercutting other countries, in most cases.
Let's first take a look at Japan, as it is the primary source country for many Asian countries. China's share in Japan's outward FDI averaged 2 percent in the 1990-1992 period. It rose to 7 percent in the 1993-1995 period, but has declined since then. In the 1999-2001 period, China accounted for only 3 percent of Japan's outward FDI and the figure only bounced back to just over 4 percent in 2002.
A similar pattern holds for Japan's FDI in Asia. Though China's share has risen steadily during the past three years, it is hard to argue that China has seized Japan's FDI from other Asian economies over the past decade.
In the late 1990s, it was Indonesia, Thailand and Singapore that took turns heading the list of destinations for Japan's FDI in Asia.
Japan's FDI in Latin America has been a mixed picture. The flow to Panama, Brazil, Chile and the Cayman Islands has been on the rise while the flow to Mexico has declined sharply. Argentina remains a negligible recipient. If there is competition for Japan's FDI, the main battlefield is within Latin America itself.
The CEE remains a minor destination for Japan's FDI, but it has been attracting more FDI flow from Japan. Though Japan's investment in Russia has been minuscule, large Japanese automobile makers and electronics companies have set up operations in Hungary, the Czech Republic and Poland. China has no comparative advantage in helping Japanese companies expand their EU markets -- a key objective of Japan's FDI in the region --not to mention competing with the CEE.
With the US's outflowing FDI, China's position is even less significant. Since 1995, China's share in US global FDI outflows has been steady at around 1 percent. Like Japan, the United States directs most of its investment to the industrialized countries. Among developing countries and regions, Mexico, Brazil, Bermuda, Singapore, Hong Kong SAR and the Republic of Korea each has on average drawn more US FDI than China during the past decade.
Countries in the CEE have brought in more American investors in recent years, so the China threat is out of the question. Nevertheless, as the EU is the main source region for FDI flowing into the CEE, we must examine whether the story is the same there.
The EU's position in China's total FDI inflows improved continuously in the 1990s. However, these economies have allocated smaller shares of their FDI to China since the peak years in the late 1990s. The share declined to 7 percent in 2002 from 11 percent in 1999.
By contrast, CEE has remained the primary destination of EU investment with the EU enlargement. According to figures from the United Nations Conference on Trade and Development, by 2000, EU FDI amounted to near or more than 70 percent of the total flow in most CEE member states (with the exception of Russia).
ASEAN countries have seen shrinking FDI flows from the EU in recent years, but that is mainly because the EU multinational corporations also directed their FDI to North America and Latin America, along with their increasing investment in the CEE.
China's diversification of its FDI sources helped raise its share in global FDI, particularly during the economic downturn. Individual home countries' outward flows may decline, but if a country can manage to attract decent flows from most of them, then the aggregate inflows will be significant.
Compared to those countries that depend heavily on few sources, China's approach clearly has an advantage. For instance, many Latin American countries suffered greatly when the United States reduced its investment in the region over the past three years. So did several CEE countries as EU outflows crashed in the 2001-2002 period.
The global downturn witnessed less flows from the EU to China, too, but China managed to obtain more flows from Japan and the United States while maintaining the upward investment trends from Hong Kong, Taiwan and the Republic of Korea, thus offsetting the declines on the EU front.
Some people may argue that the data at the aggregate level may conceal the competition China imposes in certain specific industries, especially labor-intensive ones. Given that China has comparative advantages in labor costs, this sounds reasonable.
It is worthwhile to explore the geographical composition of individual industries in major countries' outward FDI flows. Unfortunately data combining industry and geographical structures are scarce. Preliminary analysis indicates that China only competes with a few countries (such as ASEAN members) in a few industries (such as electronics and electronic equipment) without altering the results of analysis based on aggregate data.
In addition to the fundamentals mentioned above, discrepancies between China's FDI statistics and those of other countries also suggest that there might be an upward bias in China's data. To illustrate this, the gaps between China's FDI inflow data and data on outward FDI flows to China from the United States, Japan and the Republic of Korea were US$4.5 billion, US$2.5 billion and US$1.8 billion in 2002, respectively. These three gaps totaled about US$9 billion, one fifth of China's inward FDI flows.
It is uncertain what generates such dramatic differences and we may need to wait for Chinese authorities and their international counterparts to figure out the reasons.
Given that China's numbers are consistently higher than those of other countries, China's FDI data might have over-recorded its inward flows due to complication of FDI statistics itself. Though the exact magnitude remains to be examined, this can also partially relieve the concerns of some countries.
(China Daily April 28, 2004)
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