FDI in China

Synopsis
The case is a success story of China in attracting huge pool of FDI. It details the various factors
contributing to the rapid growth of FDI in China. It also carefully analyzes various positive and
negative impact of FDI in national economy and domestic business of China.

Issues
There is no any doubt that the huge economic growth of China is the result of enormous flow of
FDI in the country from all over the world. The main issues to be considered are:
a) What are the factors attributing to the growth of FDI in China?
b) Has the flow of FDI benefitted the nation?
c) Is there the threat of out drain of FDI in other countries in future?

Analysis
With the increasing trend of globalization, the flow of FDI is also increasing from developed
economies to developing economies. The flow of FDI to developing countries can be attributed
to various motives such as resource seeker, market seeker, product expansion, etc. If we consider
these factors responsible for attracting FDI, many developing countries in the world have great
availability of raw materials, market and product expansion opportunities. The major question
arise is that why was only China able to get more than 50% of the total FDI flowing to
developing countries?
Factors Attributing to growth of FDI in China
a) As the case mentions, China has gradually progressed in defining and developing its
policies to attract FDI in the country. It has made phase wise progress in addressing the
issues of FDI flow in the country which ultimately led to the huge economic upturn.
b) Referring to appendix 2 we can see that China has cheapest labor as compared to its
competitor nations. The average annual cost of labor is $729 which is least among the
compared nations. However, the lowest score for the value addition by labor force
decreases the significance of doing business based on cheap labor. But other favorable
factors have allowed investors to look over the lower productivity if Chinese labor.
c) GDP of China is one of the highest among the competitors. As given in appendix 2 the
GDP of China is 11.11% which is highest among the competitor nations. This shows the
growth in the economics activities of the nation and thereby captures the confidence of
investors.
d) Beside it, the increasing level of saving of household, favorable government policies,
high ICRG rating etc have played major role in winning the confidence of international
investors.
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e) The ethnic and cultural similarities among the nations like China, Hong Kong, Macau,
Japan, etc has eased the investors in making investment decision. As a result more than
60% of the FDI in China is among these countries.
Benefits and Harms of FDI in Chinese Economy
With the increase in the FDI, the GDP of the nation has abruptly increased. Also, it has led to the
increase in the per capita income of Chinese people. The saving of the people has increased due
to it. The country is benefitted a lot in the macro level. Beside it, the other benefits of FDI in
China are listed below:
a) It has facilitated the easy capital generation for the domestic businesses
b) The introduction of FDIs in the State Owned Enterprises has facilitated in the
restructuring of SOEs
c) FDI has helped in the integration of fragmented market of China and has contributed in
growth of national economy.
However, looking at the micro level, the domestic industries seem to be facing challenges due to
the rapid growth of FDI. The biased regulations and policies of Chinese government has also
caused problem to the private businesses of China. The interference of state in the overall
activities of private companies has made it difficult to compete with the MNCs. The main
problem faced by the private business firms is that of the fund. Despite possessing enough skills
and talents they have to depend upon the foreign investors for the capital. The restrictions set by
the state have created hurdles in the free competition of the product. China has achieved huge
success in external policies but its internal policies have made its domestic businesses
handicapped.
Challenges in copying Chinas model
The achievements made by China by alluring FDI to its country have set an example to all
developing countries in the world. Despite the political differences, China has been able to win
the confidence of investors believing in different ideologies. It has successfully crafted its
external trade reforms which has highly benefitted the national economy of China. Observing the
progress made by China through FDI, many countries in the world are now trying their best to
attract as much FDIs as possible to their nation. Despite their efforts, still the major percentage of
total FDI flows goes to China. In order to copy this strategy of China, there need to be the
replication of both the economic and political strategies of the nation. Though economics
policies and reforms can be easily copied and modified, it is very difficult to replicate the
political ideology of a nation. Being a socialist economy, the country is strictly regulating the
private companies which have favored FDI to grow against domestic firms in China.
Beside it, another major competitive advantage of China is its geographical location. China is the
hub for the ETE nations. Having similarity in ethnics and culture, there seem to be the high
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degree of trust of the investors to invest in Chinese economy. This advantage is very unlikely to
be copied by other nations which make it difficult to copy the FDI growth of China.

Conclusion
After analyzing the case, there is no doubt that China has successfully set a historic example in
world economy by booming the national economy within 2 decades of time. It has helped to
understand various factors that are essential for a nation to be attractive for the foreign
investment. Beside it, the case was greatly helpful in understanding the impact of FDI in the
domestic market. There are two coins of FDI: international market and domestic market. The
economic and political policies like that of China has significantly favored the foreign firms and
businesses and have made the domestic business suffer. The FDI often comes as a challenge for
the domestic firm. The lack of efficiencies in domestic market and weak support of the
government can result in the high dominance of foreign business over the domestic firms. Thus,
it is very essential for every nation to carefully design their external and internal trade policies
and reforms so as to reap the benefits of FDI along with safeguard of domestic businesses.