Foreign Direct Investment

Abstract        

        With the development of global economy and the globalization, Foreign Direct Investment (FDI) has become one of the major form of international capital and technological transfer in current global economy system. In this paper, I will first compare how FDI develop in the two largest FDI countries, China and US. Then, I will analysis the advantages and disadvantages about FDI and the latest trend of FDI, as well.

Introduction

        Since World War II, globalization posted steady increases everywhere in our daily life. Nowadays, the changing of economy in one country always influence the economy around the world. The global economy system is affected by Foreign Direct Investment (FDI), defined as “cross-border expenditures to acquire or expand corporate control of productive assets. FDI was first become a major form of net international borrowing for Japan and the United States (the wold’s largest international leader and borrowers respectively)”(Kenneth). Since China, a developing country, takeover US, a developed country, to be the top destination for FDI in2014, the issue of FDI is more important to the global society. Every day, companies establish new operations in foreign countries or provide additional capital to established businesses.

FDI in China VS in US

        In 1979, China began the FDI. Chinese government published several policies that agree the Chinese companies can extend their business to other countries. In October 1979, Chinese did the first FDI with a Japanese garment company. The successful investment and external interest bring a good beginning of FDI in China.

        However, from 1979 to 1984, Chinese FDI was limited due to the unopened policy. Only some professional companies with the right of foreign management could operate FDI. Those companies mainly invest the business in Asia, especially Southeast Asia, by creating agencies in these foreign countries and sold specific goods. Some international technology cooperation companies owned by the local governments also had the permission of FDI. These companies’ main market was mainly in the Middle East and Africa. They cooperated the engineering program with the local companies.

        Obviously, the tentative investments was successful. FDI extended quickly in next 5 years. To simplify the communication between the FDI companies and the government, China set up China Association of Enterprises with Foreign Investment (ACEFI). With the help from ACEFI, more private manufacturing enterprises and scientific research companies set up business in foreign countries. Additionally, the main market extended from minority ASEAN countries to all over the world. Because of the diversified subjects and fast development of the productive investments, until the end of 1990, China built 801 non-trade overseas companies in 93 countries around the world, including 109 companies in USA.

        From 1991, Chinese government published more policies to help develop FDI and encouraged more local small business invest business globally. At that time, Chinese FDI extended in more than 140 countries. Accounting to the calculation from Chinese Commerce Department, by the end of 2003, Chinese FDI  net amount was US$33.2 billion, increased dramatically from US$3 billion in 1991.

        In the recent ten years, FDI in China increased continuously, from US$74.768 billion in 2007 to US$126.27 billion in 2015. The strongest increasing happened between 2007 to 2008, from US$74.768 billion to US$92.395 billion, and 2009 to 2011, from 90.03 to 116.011 billion. And China’s net FDI reached the highest point at US$124.90 billion in 2010. The data decreased slightly between 2008 to 2009 and 2011 to 2012 due to World Economic Crisis. From the statistics by the Ministry of Commerce of the People's Republic of China, “Foreign Direct Investment in China increased by 354.20 USD HML in March of 2016. Foreign Direct Investment in China averaged 415.77 USD HML from 1997 until 2016, reaching an all time high of 1262.70 USD HML in December of 2015 and a record low of 18.32 USD HML in January of 2000.” (Trading Economics)

        As recipient country, in 2014, China overtook the US to be the largest market of FDI around world. US had been the top destination for FDI since 2003. To compare the foreign firms invested US$128billion in China in 2014, the data of US is only US$86 billion, fell by 63% comparing by 2013. US now is the third largest FDI market around the world, behinds China and HongKong. ”FDI flows to developed countries dropped by 14% to an estimated US$511billion, significantly affected by a large divestment in the United States.” (UNCTAD) “However, the UN agency said the strengthening of the US economy and the pick up in demand from lower oil prices would "favourably" affect foreign investment this year.” (BBC 2015)

        According to the National Bureau of Statistics of China, the investment mainly came from Hong Kong and Macau which takes 45%. USA and Japan both have 9%, which are the second largest investors. The third is Taiwan with 6%  and both British Virgin Islands and South Korean with 5%.

        As a domestic country, “China has a long way to go to catch up to more traditional sources of FDI. Today investment by China and emerging economies is still just a fraction of total FDI. Together, Brazil, Russia, India, China, and South Africa totaled just 1.5 percent of all foreign investment in 2013. ” (Stringer 2015)

        In US, the top 10 investor countries of FDI in 2013 was Japan (US$44.9 billion), United Kingdom (US$41.9 billion), Luxembourg (US$26.1 billion), Canada (US$23.3 billion), Switzerland (US$17.0 billion), Ireland (US$15.4 billion), Netherlands (US$12.8 billion), Norway (US$9.3 billion) and UK Islands (US$8.8 billion). Among the industries of FDI in US, the manufacture is still the investment with is one third. After manufacturing, finance and insurance is the most attractive part in financial market.

        The most attractive states to the domestic countries are South Carolina, Florida, Tennessee, California, Ohio and Virginia.

FDI Influence on economic growth

        FDI influence not only the economy of the domestic country but also the economy in the recipient country both positively and negatively. FDI has following benefits:

• Capital is generally considered as a scarce resources. To solve the problem of the insufficient capital is the main propose of importing FDI in most of developing countries. Since FDI allows the free flow of capital across the nations and get the highest rate of return. Feldstein (2000) emphasized a number of advantages that are related to unrestricted capital flows, such as: 1)International flows of capital reduce the risk faced by owners of capital by allowing them to diversify their lending and investment. 2)The global integration of capital markets can contribute to the spread of best practices of corporate governance, accounting rules, and legal traditions. 3)The global mobility of capital limits the ability of governments to pursue bad policies.

• FDI help increase manufacture industry in the domestic countries.

• Extending business in foreign countries stimulate the technology and management. Technology are taken mainly in two ways — incorporate in a production process and incorporate in a product. However, some countries, especially less developed countries, lack the resources and skills. The investment from developed countries bring modern technology and employees with better skills. Same as management. The investment of management may bring some manager with more experiences and better skills who can give better training to the employees and manage the company more efficiently in the recipient country.

• FDI affect the export system positively.

• FDI provides more position to the recipient country so that the unemployment rate decrease.

However, some studies consider that FDI have negative influence on economies in some situations.

• Some high pollution manufacture enterprises decides to invest in some developing countries, such as China. The large number of factories pollute the environment seriously.

• The FDI recipient countries may fear foreign ownership of domestic firms at the beginning of the transition. Additional inflows of FDI in firms may push out of the market other firms without FDI. When the business is lower than the average market productivity, the industry benefits due to increases in productivity. Otherwise, FDI inflows are harmful to the recipient country.

• Due to the specific requirement when domestic country choosing the location of the investment, FDI increase the diversity between the states and city in the recipient countries. For example, in China, most of the financial investment prefer to set up their new office in Shanghai, Beijing or Guangzhou, the places with developed economy, rather than some developing cities. In this situation, the gap between the rich and the poor are increasing.

Recent trend of FDI

        In 2014, the national governments published more active policies to development FDI. Base on the calculations, there were 37 countries published 63 new policies on FDI. Among these 63 policies, 47 of them are stimulative to FDI, only 9 policies show more limitation on FDI due to the national security. “The share of liberalization and promotion increased from 73 per cent in 2013 to 84 per cent in 2014” (UNCTAD, 2015).