Fdi In China

Table of Content

1.0 Introduction

2.0 Summary

3.0 Conclusion

4.0 Text Analysis

5.0 References

1.0 Introduction

I found this article "Foreign direct investment: Companies rush in with the cash" on the financial times website (www.FT.com) published December 11, 2002 written by John Thornhill. The reason for choosing this article is my personal interest in the Chinese economy and its attractiveness to the foreign investors. Apart from the foreign direct investment this topic has also helped me in understanding the impact of Chinese economy on the global market.

China the land of giant panda has also become the land of numbers and achievments. Official figures shows that China's economy is the fourth largest in the world when measured by nominal GDP and is predicted to surpass Germany to take the third place in early 2008.

2.0 Summary

China has come a very long way in the past 25 years. China has grown at nearly 10 percent a year over the past 20 years. China's explosion on to the world investment, production and trade scene is the product of its size, growth and openness. This is leading to tremendous changes in the global economy.

China has become the second largest foreign direct investment recipient country in the world and the largest recipient among developing countries. Since 1978 the foreign direct investment has flooded into the country. In 2002 china became the first country for a very long time to attract more foreign direct investment in one year then the United States (bringing in US$53.2 billion while US$52.7 billion flowed into the United States).

Foreign direct investment has played a vital role in the transformation of the Chinese economy in China, with value contracted increasing from US$ 52.1 billion (1998) to US$ 115.1 billion (2003).

In geographical terms, the source of the Foreign Direct Investment in 2003 was Asia 64 per cent, Latin America 13 per cent, North America 13 per cent and Europe per cent.

In terms of geographical breakdown of exports, China's major trading partner is Asia accounting for around 51 per cent followed by USA 22 per cent and Europe per cent.

Since 2001, foreign direct investment

has arrived at a rate of roughly $1 billion a week

Foreign Direct Investment in China, 2001-06

%

Change,

2001 2002 2003 2004 2005 2006 2001-06

No. of contracts 26,140 34,171 41,081 43,664 44,001 41,485 59

Amount utilized

($ Billion) 47 55 54 61 60 70 48

Table 1

In terms of geographical breakdown of imports, again the major trading partner is Asia accounting for around 66 per cent followed by Europe 17 per cent and USA 9 per cent. The import/export imbalance with respect to the USA is one of the reasons causing discomfort in Washington

China's economic output for 2006 was $2.68 trillion USD. Its per capita GDP in 2006 was approximately US $2,000, still low by world standards (110th of 183 nations in 2005), but rising rapidly. As of 2005, 70 per cent of China's GDP is in the private sector. The smaller public sector is dominated by about 200 large state enterprises concentrated mostly in utilities, heavy industries, and energy resources.

The government of china is very keen to encourage foreign investors, because foreign companies are regarded as relatively good corporate citizens, taxpayer, and generating exports.

China is the most populous country in the world with a population of 1.298 billion (Estimated 2004). One of the biggest reasons for the inflow of foreign direct investment into the Chinese market is its low cost labour, which has put china on the radar of every manufacturing business. Another reason that makes china attractive to foreign investors is its massive domestic consumer market.

source : http://www.icoste.org/roundup0405

Table 2

From the above table it is very clear that In terms of regional distribution foreign direct investment inflows have been heavily concentrated in China's coastal provinces (eastern region), while the central and western regions have attracted only marginal share of the national foreign direct investment inflows.

The possibility of getting access to modern technology is one of the most important reasons why countries wish to attract foreign investment. Direct technology transfers from multinational corporations to local subsidiaries allow host countries to have access to technologies that they cannot produce by themselves. In addition, foreign direct investment can also lead to indirect productivity gains for host country firms through the realization of external economies.

China has an impressive amount of technological know-how and manufacturing capability, the technology inflow has allowed China to develop its economy much more quickly than countries have in the past. In 1990, China lead the world in the production of only cotton textiles and cathode ray televisions. By 2002, it had added refrigerators, cameras, motorbike, desktop PCs, DVD players and cell phones. The acquisition of Lenovo from IBM is a typical example of China making a leap in design and brand building.

China's increasingly close economic link with outside world not only expands china interests, but also raise the possibility of china's collision with other countries in the economic field. Foreign direct investment may bring detrimental effect to the Chinese economy. Some economist claims that foreign capital inflows can have negative impacts on China's development by substituting