foreign investment: impact on china's economy

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© 2010 Wiley Periodicals, Inc.Published online in Wiley Online Library (wileyonlinelibrary.com).DOI 10.1002/jcaf.20624

featur

e artic

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Roger Y. W. Tang, Ali M. Metwalli, and Ola Marie Smith

Foreign direct investment (FDI) has been a key

driver of economic growth, globaliza-tion of business, and expansion of interna-tional trade for many decades. We have seen many examples in North America, West-ern Europe, Japan, Southeast Asia, Taiwan, Brazil, Mexico, and, most recently, China. In today’s age of the Internet and glo-balization, the impact of FDI and foreign-invested enterprises (FIEs) on a hosting country’s economy will be more profound than it was in the twentieth century.

China began its economic reform and opened its door to foreign investors in 1979. Since then, China’s economy has been growing at an average rate of about 10 percent per year. In three decades, China has suc-cessfully transformed itself from a backward, agriculture-oriented economy to a modern and industrialized economy.

In this transformation process, FDI and foreign-invested enter-prises played a vital role in modernizing China’s economy and significantly expanding its industrial outputs and trade. In 2009, almost all major industrial countries experienced a financial crisis and recession. The United States, the United Kingdom, Japan, Hong Kong, and Taiwan all had negative growth rates in that year. China and India were two of a few exceptions. In 2009, China grew at a respectable rate of 8.4 percent, while India grew at a rate of 6.1 percent. In the

first quarter of 2010, China’s gross domes-tic product (GDP) increased 11.9 percent from a year earlier. The purpose of this article is to explain some important changes in China’s economy in the last two decades and to explain the roles played by FIEs in the country’s economic growth and trade expansion. In the fol-lowing sections, we

will discuss these topics:

foreign direct investment in • China;sources and destination of • FDI in China;foreign-invested enterprises • in China;FIEs and their impact on • China’s foreign trade;FIEs’ impact on industrial • output and employment; andChina’s foreign exchange • reserve and currency issues.

Conclusions and implica-tions for U.S. investors will be

Foreign direct investment (FDI) has been a key driver of economic growth, globalization of busi-ness, and the expansion of international trade. And in today’s age of the Internet and global-ization, the impact of FDI and foreign-invested enterprises (FIEs) on a hosting country’s econ-omy will be more profound than it was in the twentieth century. Given all that, what roles are FIEs playing in the economy of the world’s most populous country—China? And what are the implications for investors? © 2010 Wiley Periodicals, Inc.

Foreign Investment: Impact on

China’s Economy

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26 The Journal of Corporate Accounting & Finance / September/October 2010

DOI 10.1002/jcaf © 2010 Wiley Periodicals, Inc.

2009, the total utilized FDI in current prices was about $959 billion. Over the last 20 years, FDI has completely transformed the Chinese economy and has significantly expanded China’s international trade.

The U.S. direct investment in China was about $284 mil-lion in 1989 (see Exhibit 1). That accounted for about 8.4 percent of the total FDI in

Also shown are the percentages of the U.S. share of FDI in China for those years. From Exhibit 1, we can observe that utilized FDI in China was only about $3.4 billion in 1989. Since then, uti-lized FDI has increased almost steadily to $92.4 billion in 2008. Due to the worldwide economic recession, utilized FDI decreased by 2.6 percent to about $90 billion in 2009. From 1989 to

discussed toward the end of the article.

FDI IN CHINA

In recent years, China has been one of the largest host-country recipients of FDI. Exhibit 1 presents the statistics of utilized (or realized) FDI in China and U.S. direct investment in China from 1989 to 2009.

Utilized Foreign Direct Investment in China and United States’ Share (Amounts in Millions of U.S. $)

Year Utilized FDI in China U.S. FDI in China U.S. Share (%)

1979–1988 12,473

1989 3,393 284 8.37

1990 3,487 456 13.08

1991 4,366 323 7.40

1992 11,088 511 4.61

1993 27,515 2,063 7.50

1994 33,767 2,491 7.38

1995 37,521 3,083 8.22

1996 41,726 3,443 8.25

1997 45,257 3,239 7.16

1998 45,463 3,898 8.57

1999 40,319 4,126 10.23

2000 40,715 4,384 10.77

2001 46,878 4,430 9.45

2002 52,743 5,420 10.28

2003 53,505 4,200 7.85

2004 60,630 3,940 6.50

2005 72,406 3,070 4.24

2006 72,715 2,865 3.94

2007 83,521 2,616 3.13

2008 92,395 2,944 3.19

2009 90,033 3,576 3.97

1989–2009 total 959,443 61,362 6.40

Source: China Statistical Yearbook, various years; China Investment Promotion Agency.

Exhibit 1


The Journal of Corporate Accounting & Finance / September/October 2010 27

© 2010 Wiley Periodicals, Inc. DOI 10.1002/jcaf

were $26.3 billion and $24.5 bil-lion, respectively. If we review the annual data carefully, we will notice that Taiwan was the sec-ond-largest direct investor from 1992 to 1997, while the United States became the second-largest provider of FDI in China in 1998.

From 1992 to 2000, Singa-pore provided $16.7 billion of direct investment in China (see Exhibit 2). The Virgin Islands (a tax haven) became an impor-tant source of FDI in China in 1997. From 1995 to 2000, the Virgin Islands provided $13.1 billion of FDI in China. Other countries that provided signifi-cant amounts of FDI in China included South Korea, the United Kingdom, Germany, and France.

SOURCES AND DESTINATION OF FDI IN CHINA

Many countries have pro-vided direct investment funds to China over the last two decades. Exhibit 2 shows the top ten source countries or territories of utilized FDI in China from 1992 to 2000. During that period, China received a total of $323.3 billion of FDI from other coun-tries. Of this amount, $156.2 billion (or 48.3 percent) was provided by Hong Kong inves-tors. The second-largest country investor was the United States, providing $27.3 billion of FDI (or 8.5 percent) to China. This was followed closely by Tai-wanese and Japanese investors. Taiwan’s and Japan’s investments

China in that year. From 1990 to 2002, U.S. FDI in China increased almost steadily and reached its peak of about $5.4 billion in 2002. After 2002, U.S. direct investment in China decreased for several years; in 2008, it started to increase again. The U.S. direct invest-ment in 2009 was about $3.6 billion, and that accounted for about 4 percent of all FDI in China in that year. From 1989 to 2009, U.S. companies invested a total of $61.4 billion of direct investment in China, accounting for about 6.4 percent of the total FDI in China during that period. Details of FDI in China from other source coun-tries will be discussed in the next section.

Top 10 Source Countries/Territories of Utilized FDI in China, 1992–2000 (Amounts in Millions

of U.S. $)

Country/Territory

and Rank 1992 1993 1994 1995 1996 1997 1998 1999 2000

1992–2000

Total

FDI Total 11,008 27,515 33,767 37,521 41,726 45,257 45,463 40,319 40,715 323,292

1. Hong Kong 7,507 17,275 19,665 20,060 20,677 20,632 18,508 16,363 15,500 156,187

2. United States 511 2,063 2,491 3,083 3,443 3,239 3,898 4,126 4,384 27,329

3. Taiwan 1,051 3,139 3,391 3,162 3,475 3,289 2,915 2,599 2,296 26,316

4. Japan 710 1,324 2,075 3,108 3,679 4,326 3,400 2,973 2,916 24,513

5. Singapore 122 490 1,180 1,851 2,244 2,606 3,404 2,642 2,172 16,712

6. Virgin Islands 304 538 1,717 4,031 2,659 3,833 13,082

7. South Korea 119 374 723 1,043 1,358 2,142 1,803 1,275 1,490 10,326

8. United Kingdom 38 221 689 914 1,301 1,858 1,175 1,044 1,164 8,404

9. Germany 89 56 259 386 518 993 737 1,373 1,041 5,453

10. France 45 141 192 287 424 475 715 884 853 4,016

Source: China Statistical Handbook, various years; China Investment Promotion Agency.

Exhibit 2




same period. Interestingly, the Cayman Islands and Western Samoa (two tax havens) also provided about $13.9 billion and $10.6 billion, respectively, to China from 2001 to 2008. These two tax havens did not have significant FDI in China before 2001.

Exhibit 4 shows the regis-tered foreign-invested enterprises and the total investment by provinces and cities at the end of 2008. Currently, China has 22 provinces, 5 autonomous regions, and 4 major municipalities under the control of the central govern-ment. The 22 provinces in alpha-betical order are Anhui, Fujian, Gansu, Guangdong, Guizhou, Hainan, Hebei, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Jiangxi, Jilin, Liaoning, Qinghai,

1992 to 2000. The Virgin Islands contributed $76.4 billion (or 14.3 percent) of FDI and became the second-largest provider of FDI in China. The Virgin Islands are a well-known tax haven and are the domicile of many large off-shore companies.

The third-largest provider of China’s FDI was Japan, provid-ing $37.4 billion (or 7 percent) of FDI in China between 2001 and 2008. South Korea and the United States provided $31.5 billion and 29.5 billion of FDI, respectively, during the same period. Taiwan provided $21.4 billion (or 4 percent) of FDI in China between 2001 and 2008, while Singapore contributed about $20.7 billion. Germany provided about $10.5 billion in direct investment during the

Together, the top ten source countries or territories provided about 90.4 percent of all FDI in China from 1992 to 2000.

Exhibit 3 provides a more recent list of the top ten source countries or territories of uti-lized FDI in China from 2001 to 2008. During that period, FDI continued to grow, with China receiving a total of $534.8 bil-lion of FDI from other countries. By comparing Exhibit 2 with Exhibit 3, we can observe that the lists of countries in the two exhibits are quite similar, but the rankings have changed with the exception of Hong Kong. Hong Kong remained the top investor, providing 33.3 percent of FDI in China; however, this is less than the 48.3 percent of FDI Hong Kong provided from

Top 10 Source Countries/Territories of Utilized FDI in China, 2001–2008 (Amounts in Billions of

U.S. $)

Rank Country/Territory 2001 2002 2003 2004 2005 2006 2007 2008 2001–2008 Total

FDI Total 46.88 52.78 53.50 60.63 72.41 72.72 83.52 92.40 534.80

1 Hong Kong 16.72 17.86 17.70 19.00 17.95 20.23 27.70 41.04 178.20

2 Virgin Islands 5.04 6.12 5.78 6.73 9.02 11.25 16.55 15.95 76.44

3 Japan 4.35 4.19 5.05 5.45 6.53 4.60 3.59 3.65 37.41

4 South Korea 2.15 2.72 4.49 6.25 5.17 3.89 3.68 3.14 31.49

5 United States 4.43 5.42 4.20 3.94 3.07 2.87 2.62 2.95 29.50

6 Taiwan 2.98 3.97 3.38 3.12 2.15 2.14 1.77 1.90 21.41

7 Singapore 2.14 2.34 2.06 2.01 2.20 2.35 3.18 4.44 20.72

8 Cayman Islands N/A 1.18 0.87 2.04 1.95 2.10 2.57 3.14 13.85

9 Western Samoa N/A 0.88 0.99 1.13 1.35 1.54 2.17 2.55 10.61

10 Germany 1.21 0.93 0.86 1.06 1.53 3.25 0.73 0.90 10.47

Source: China Statistical Yearbook, various years; China Investment Promotion Agency.

Exhibit 3




Registered Foreign-Invested Enterprises and the Total Investment at the End of 2008*

Total Investment by 2008

Rank of Total

Investment

Provinces and

Cities

2008 Number of

Foreign-Invested

Enterprises (Units)

Amounts in

Billions of

U.S. $ % of Total

2008 Exports

(Amounts in

Billions of U.S. $)

Total 434,701 2,261.6 100.0%

1 Jiangsu 49,928 415.9 18.4% 174.95

2 Guangdong 90,114 372.6 16.5% 255.67

3 Shanghai 51,532 294.0 13.0% 113.56

4 Zhejiang 28,533 158.3 7.0% 54.22

5 Liaoning 22,321 124.8 5.5% 20.27

6 Fujian 23,809 112.1 5.0% 32.507 Shandong 32,052 101.2 4.5% 50.60

8 Beijing 22,485 98.3 4.4% 23.06

9 Hainan 4,921 96.7 4.3% 0.65

10 Tianjin 14,536 93.8 4.2% 28.90

11 Sichuan 9,398 42.1 1.9% 3.55

12 Hubei 7,560 34.0 1.5% 3.79

13 Hebei 10,536 33.8 1.5% 9.75

14 Jiangxi 6,640 33.5 1.5% 3.78

15 Henan 11,166 29.3 1.3% 1.71

16 Hunan 5,085 26.6 1.2% 1.05

17 Guangxi 4,297 25.8 1.1% 1.62

18 Anhui 5,523 25.5 1.1% 3.19

19 Chongqing 4,333 23.8 1.1% 0.96

20 Inner Mongolia 2,326 22.2 1.0% 0.91

21 Shanxi 2,168 18.0 0.8% 1.28

22 Jilin 4,158 17.5 0.8% 1.34

23 Heilongjiang 5,901 16.2 0.7% 0.81

24 Yunnan 4,084 14.1 0.6% 0.43

25 Shaanxi 4,312 13.7 0.6% 1.10

26 Xinjiang 1,402 4.6 0.2% 0.23

27 Gansu 2,142 3.8 0.2% 0.17

28 Qinghai 469 3.3 0.2% 0.05

29 Guizhou 2,201 3.2 0.2% 0.24

30 Ningxia 637 2.4 0.1% 0.19

31 Tibet 132 0.5 0.0% 0.00

Source: China Statistical Yearbook, 2009.*Amounts and percentages may not add up to totals due to rounding.

Exhibit 4




percent was in real estate. About 10 percent of the FDI was in the finance and banking industries. Some of the FIEs can be quite large in terms of their annual sales. Exhibit 6 shows the largest 100 FIEs measured by annual sales for 2008. We can observe that these largest 100 FIEs were subsidiaries of major multinational companies such as Nokia, Volkswagen, General Motors, Motorola, Toyota, Honda, Nissan, Hewlett Packard, Dell, and so forth. The largest FIE was Hongfujin Preci-sion Industry (Shenzhen), with annual sales of about $27 billion, and the second-largest FIE was

Nokia Telecommunica-tion, with sales of about $13.8 billion. Some large multinational companies have more than one sub-sidiary in the top 100. For example, Volkswagen has Fay-Volkswagen Sales (No. 5), Shanghai Volks-wagen Automotive Sales (No. 13), and Shanghai Volkswagen Automo-tive (No. 17). Toyota has Dongfeng Toyota Auto Sales (No. 14), Tianjin Toyota Auto (No. 24), and Toyota Automobile (China)

Investment (No. 48). Dell has Dell Computer (Xiamen) (No. 56) and Dell Computer (China) (No. 63). Interestingly, Lenovo is viewed as an FIE, and it has Lenovo Information Product (Shenzhen) (No. 25), Lenovo (Beijing) (No. 31), and Lenovo (Shanghai) (No. 84). Lenovo’s stock is listed on the Hong Kong Stock Exchange, and it may be considered a Hong Kong inves-tor. We can tell from the names of the companies that many FIEs in China are joint ventures with Chinese companies. Some are foreign wholly owned companies such as Amway (China) (No. 92),

received $294 billion (13 per-cent), Beijing received $98.3 billion (4.4 percent), Tianjin $93.8 billion (4.2 percent), and Chongqing received only $23.8 billion (1.1 percent). Most other provinces listed in Exhibit 4 are located in the central or west-ern regions of China. Provinces such as Gansu and Qinghai and autonomous regions like Xin-jiang, Ningxia, and Tibet are not popular among foreign inves-tors because these regions are less developed and they are not close in geographical proximity to overseas investors from Hong Kong, Taiwan, Japan, and South Korea. Since most of the FIEs

are located in eastern coastal provinces and cities, most exports from China have also come from those provinces and cities, as shown in Exhibit 4.

FOREIGN-INVESTED ENTERPRISES IN CHINA

Foreign-invested enterprises in China are operating in many different industries. Recent sta-tistics published by the Chinese government indicate that in 2007, about half of the utilized FDI was invested in manufactur-ing industries, while about 20

Shaanxi, Shandong, Shanxi, Sichuan, Yunnan, and Zhejiang. In addition, China also consid-ers Taiwan as its twenty-third province. The five autonomous regions are Guangxi, Inner Mon-golia, Ningxia, Xinjiang Uygur, and Xizang (Tibet). The four major municipalities under the central government’s control are Beijing, Tianjian, Shanghai, and Chongqing. Each of these four major cities has a population of more than 10 million. In addi-tion, the special administrative regions (SARs) of Hong Kong and Macau are also considered parts of China. The Hong Kong and Macau SARs have their own chief executives and have a high degree of autonomy, but China controls both their foreign affairs and defense matters. A break-down of FIEs by province/city is shown in Exhibit 4. A map of all provinces and cities under the control of the central government, Hong Kong, and Macau is shown in Exhibit 5.

Exhibit 4 shows that at the end of 2008, there were 434,701 FIEs operating in China with a total invest-ment of $2,262 billion. Most of the FIEs are located in coastal provinces and cities. For example, Jiangsu Province had 49,928 FIEs with a total invest-ment of about $416 billion, and Guangdong Province had 90,114 FIEs with an investment of $373 billion. Together, Jiangsu and Guangdong had about 35 percent of the national FDI. Other prov-inces receiving large amounts of FDI included Zhejiang ($158 billion, or 7 percent), Liaoning ($125 billion, or 5.5 percent), Fujian ($112.1 billion, or 5 percent), and Shandong ($101 billion, or 4.5 percent). Among the four major cities, Shanghai

Provinces such as Gansu and Qinghai and autonomous regions like Xinjiang, Ningxia, and Tibet are not popular among foreign investors because these regions are less developed and they are not close in geographical proximity to overseas investors from Hong Kong, Taiwan, Japan, and South Korea.




announced that it would spend $490 million on a new plant in China that could increase significantly Ford’s production in China. The plant may be ready in 2012.Novartis announced in • November 2009 that it would spend $1 billion to expand its R&D Center in Shanghai and hire about 1,000 new employees.Also in November 2009, • the Walt Disney Company obtained approval from the

joint venture with the FAW Group Cooperation by mak-ing a combined investment of 2 billion yuan ($293 million) to make light-duty trucks in Changchun, Jilin Province.Volkswagen AG announced • in September 2009 that it will invest 4 billion ($5.83 billion) to increase produc-tion and expand capacity in China by 2011.In September 2009, the • Ford Motor Company

Sony (China) (No. 61), and Wal-Mart (China) Investment (No. 83).

In 2009, many multinational companies continued to invest in China. The following are some examples:

Samsung decided in 2009 to • invest an additional $1 bil-lion to develop more prod-ucts and to expand its opera-tions in China.General Motors (GM) • announced in August 2009 that it is forming a 50-50

Exhibit 5

China Map With Provinces




Top 100 Foreign-Invested Enterprises in China, 2008 (Amounts in Billions of U.S. $)

Exhibit 6

2008

Rank Company

Total

Sales

1 Hongfujin Precision Industry (Shenzhen) 26.99

2 Nokia Telecommunication 13.78

3 China Offshore Petroleum (China) 11.36

4 Dagong (Shanghai) Computer 10.54

5 Fay-Volkswagen Sales 10.42

6 Dafong (Shanghai) Computer 9.48

7 Angang Steel 9.43

8 Shanghai GM Automobile 9.37

9 Fay-Volkswagen 9.22

10 Motorola (China) Electronic 8.10

11 Maanshan Steel 7.29

12 Huaneng International Power 7.26

13 Shanghai Volkswagen Automotive Sales 7.24

14 Dongfeng Toyota Auto Sales 7.15

15 Dongfeng Auto 7.06

16 Air China 6.77

17 Shanghai Volkswagen Automotive 6.74

18 Yingshunda Science & Technology 6.43

19 Nokia (China) Investment 6.40

20 China Southern Airlines 6.35

21Futaihong Precision Industry (Shenzhen)

6.08

22 Jiangxi Copper 5.96

23 Guangzhou Honda Automobile 5.96

24 Tianjin Toyota Auto 5.92

25 Lenovo Information Product (Shenzhen) 5.70

26 Tianjin Samsung Communication Science & Technology

5.64

27 Nissan (China) Investment 5.41

28 Qunkang Science and Technology (Shenzhen)

5.31

29 Dalian West Pacific Petrochemical 5.12

2008

Rank Company

Total

Sales

30 China Eastern Airlines 5.03

31 Lenovo (Beijing) 4.77

32 Beijing Sony & Ericsson Putian Mobile Communication

4.70

33 Daye (Shanghai) Computer Technology 4.65

34 Guangzhou Toyota Automobile 4.62

35 Fujian Jielian Electronic 4.57

36 Sinopec Hainan Petrochemical 4.32

37 Hongfutai Precision Electronics 4.15

38 Changan Ford-Mazda Auto 4.14

39 Sinochem Fertilizer 3.85

40 Xijie International Technology 3.62

41 Ningbo Qimei Electronics 3.57

42 Flextronics Science & Technology (Zhuhai)

3.49

43 Shanghai Secco Petrochemical 3.49

44 Shanghai Hewlett Packard 3.38

45 Beijing Hyundai Auto 3.38

46 CNOOC and Shell Petrochemicals Marketing

3.37

47 Zhangjiagang Hongfa Steel 3.35

48 Toyota Automobile (China) Investment 3.32

49 Shanghai Friendship Group 3.30

50 Hangzhou Motorola Mobile & Communication

3.29

51 Henan Shuanhui Investment and Development

3.28

52 Guangdong Midea Refrigerant Equipment

3.20

53 Zhangjiagang Pohang Stainless Steel 3.11

54Shanghai Zhenhua Gangkou Jixie (Jituan) Gufen

3.02

55 Shanghai Material Trading 3.02

Continued




in Shenzhen, China, in 1990. By March 2010, McDonald’s had about 1,100 outlets in China, and they expect to increase the num-ber of outlets to a total of 2,000 by the end of 2013. In early 2010, McDonald’s employed about 60,000 people in China. In 2008, China accounted for

petrochemical complex in Fujian Province and plans to open and operate at least 750 gas stations in China.

McDonald’s Corporation represents another corporate success story in China. The company opened its first outlet

Chinese central govern-ment to build a Shanghai Disneyland. The initial park will cost about $3.5 billion to build in the city’s Pudong District.On November 11, 2009, • Exxon Mobil started up a $4.5 billion refining and

Top 100 Foreign-Invested Enterprises in China, 2008 (Amounts in Billions of U.S. $) (Continued)

Exhibit 6

2008

Rank Company

Total

Sales

56 Dell Computer (Xiamen) 2.97

57 Rizhao Iron & Steel 2.94

58 Flextronics Science & Technology (Zuhai)

2.94

59 Fushiking Jingmi Zujian (Beijing) 2.91

60 Dongfeng Peugeot Citroen Automobile 2.90

61 Sony (China) 2.79

62 Inner Mongolia Mengniu Dairy Shareholding

2.76

63 Dell Computer (China) 2.71

64 Weixinzitong (Kunshan) 2.70

65 Changshuo Technology (Shanghai) 2.69

66 Weizhizitong (Kunshan) 2.68

67 Dongfeng-Honda Auto 2.66

68 Shanghai Electric Group 2.63

69 BASF-YPC 2.56

70 Tagnshan Guofeng Iron & Steel 2.51

71 CNHTC Jinan Truck 2.50

72 BMW (China) Automobile Trading 2.47

73 Rizhao Steel 2.41

74 Qisda (Suzhou) 2.40

75 Dafu (Shanghai) Computer Science & Technology

2.40

76 Wuxi Sharp Electronic Components 2.35

77 Mercedes-Benz (China) 2.33

2008

Rank Company

Total

Sales

78 Shanghai Bell Alcatel 2.32

79 TCL King Electronic (Huizhou) 2.29

80 Shenzhen Huawei Mobile Communication

2.27

81 Nanjing Ericsson Panda Communication 2.27

82 Yanzhou Coal Industry Shareholding 2.26

83 Wal-Mart (China) Investment 2.25

84 Lenovo (Shanghai) 2.23

85 Shanghai Samsung Semiconductor 2.20

86 Samsung (China) Investment 2.18

87 Linyi Xincheng Jinluo Meat Products 2.16

88 Jinlong Copper 2.15

89 Shenyang Huachen Jinbei Auto 2.07

90 Tianjin Samsung Electronic Monitor 2.06

91 LG Electron (Huizhou) 2.03

92 Amway (China) 2.02

93 Anhui Jianghuai Automobile 2.02

94 Inventec Appliances (Pudong) 2.00

95 Zhangjiagang Hongchang Steel 1.99

96 Shanghai Pudong International Airport Aviation Oils

1.95

97 Donghai Oils & Grains (Zhangjiagang) 1.95

98 P&G (G.Z.) 1.94

99 Freescale Semiconductor (China) 1.94

100 Matsushita Electronic (China) 1.93




about 23 percent of McDonald’s revenue from the Asia Pacific and the Middle East and African region, and its share is grow-ing. A company official has said that China is the fastest-growing market from both the income and revenue standpoints.

In March 2010, McDonald’s also launched the first McDon-ald’s Hamburger University in China by investing 250 million yuan (or $36.6 million) in the university in Shanghai. It will be a McDonald’s training school for such areas as local talent devel-opment and real-estate manage-ment.

FIES AND THEIR IMPACT ON CHINA’S FOREIGN TRADE

Over the last two decades, FDI had a signifi-cant impact on the expan-sion of China’s foreign trade. Exhibit 7 shows the imports and exports by FIEs and also their percent-ages in national imports and exports totals for 1980 to 2009. We can observe that in the first decade after China adopted its open-door policy in 1979, FIEs had only a small impact on China’s imports and exports. For exam-ple, from 1980 to 1984, imports and exports of FIEs accounted for no more than 1.5 percent of the national totals. The percent-ages of FIE trade to the national total increased gradually from 1985 to 1989, but the percent-ages were still less than 15 per-cent of the national totals.

The first half of the 1990s witnessed significant increases in FIE trade in relation to China’s foreign trade. For example, imports by FIEs accounted for 23.1 percent of the national total in 1990, but the corresponding

percentages went up to 45.8 per-cent in 1994. The percentages of FIEs’ exports also increased from 12.6 percent in 1990 to 28.7 percent in 1994. In 1999, the imports by FIEs were $85.9 billion, accounting for 51.8 percent of the national import total. In the same year, FIEs’ exports were worth $88.6 billion, equivalent to 45.5 percent of the national export total.

China’s imports and exports continued to expand rapidly from 2000 to 2008, as did the imports and exports of FIEs. In 2008, imports by FIEs were a record of $620 billion, or 54.7 percent of the national total. Exports by

FIEs reached a record of $790.5 billion, or 55.3 percent of the national export total. The year 2009 was a year of recession and financial crisis, but FIEs in China still managed to import $545.2 billion of goods and export $672.2 billion of mer-chandise. In 2009, the combined total imports and exports of FIEs were $1,217.4 billion, which accounted for 55.2 percent of the national total.

Many large FIEs are the engine of China’s exports. Exhibit 8 shows the top 25 FIEs with significant exports in 2005 and 2006. The list looks like the who’s who of the most powerful

FIE exporters in China. At the top of the list is Foxconn Preci-sion Industry (Shenzhen), which exported $14.5 billion of goods in 2005 and $18.3 billion in 2006. Foxconn is a subsidiary of Hong Hai Enterprise with its world headquarters in Taiwan. Foxconn is known for assem-bling the iPod and the iPhone for Apple. They also produce laptops and other electronic products for Dell and other U.S. brand-name products. Also included in the list are U.S. subsidiaries such as Motorola (China) Electron-ics, Hangzhou Motorola Mobil Telecommunication Equipment, Intel Technology (China), Dell

(Xiamen), and subsidiar-ies of other well-known multinational companies (MNCs), including Nokia, Samsung, Sony, Ericsson, and so forth. Together, these 25 FIEs exported a total of $108.2 billion worth of goods to other countries in 2006.

FIES’ IMPACT ON INDUSTRIAL OUTPUT AND EMPLOYMENT

FDI in China not only helped expand China’s foreign trade, but also provided for the following short-term and long-term benefits to China’s econ-omy as explained by Edward Tse in his new book, The China Strategy:

In the short term, [FDI] has brought invest-ment, created jobs and demand, boosted trade, and generally stimulated the economy; in the long term, it exposed Chinese companies to competition and the best practices of global businesses. The best

The first half of the 1990s witnessed significant increases in FIE trade in relation to China’s foreign trade. For example, imports by FIEs accounted for 23.1 percent of the national total in 1990, but the corresponding percentages went up to 45.8 percent in 1994.




Imports and Exports by FIE in China, 1980–2009 (Amounts in Billions of U.S. $)

Imports Exports

Year National Total FIE % Share National Total FIE % Share

1980 20.0 0.03 0.2% 18.1 0.01 0.1%

1981 22.0 0.11 0.5% 22.0 0.03 0.2%

1982 19.3 0.28 1.4% 22.3 0.05 0.2%

1983 21.4 0.29 1.4% 22.2 0.33 1.5%

1984 27.4 0.40 1.5% 26.1 0.07 0.3%

1985 42.3 2.06 4.9% 27.4 0.30 1.1%

1986 42.9 2.40 5.6% 30.9 0.58 1.9%

1987 43.2 3.37 7.8% 39.4 1.21 3.1%

1988 55.3 5.88 10.6% 47.5 2.46 5.2%

1989 59.1 8.80 14.9% 52.5 4.91 9.4%

1990 53.3 12.30 23.1% 62.1 7.81 12.6%

1991 63.8 16.91 26.5% 71.9 12.05 16.8%

1992 80.6 26.39 32.7% 84.9 17.36 20.4%

1993 104.0 41.83 40.2% 91.7 25.24 27.5%

1994 115.6 52.93 45.8% 121.0 34.71 28.7%

1995 132.1 629.4 47.7% 148.7 46.88 31.5%

1996 138.8 75.60 54.5% 151.1 61.51 40.7%

1997 142.4 77.72 54.6% 182.7 74.90 41.0%

1998 140.2 76.71 54.7% 183.8 80.96 44.1%

1999 165.7 85.88 51.8% 194.9 88.63 45.5%

2000 225.1 117.27 52.1% 249.2 119.44 47.9%

2001 243.6 125.86 51.7% 266.2 133.24 50.1%

2002 295.2 160.29 54.3% 325.6 169.94 52.2%

2003 412.8 231.91 56.2% 438.3 240.34 54.8%

2004 561.4 324.56 57.8% 593.4 338.61 57.1%

2005 660.1 387.51 58.7% 762.0 444.41 58.3%

2006 791.6 472.62 59.7% 69.1 563.83 58.2%

2007 956.3 560.95 58.7% 1,217.8 695.37 57.1%

2008 1,133.1 619.96 54.7% 1,428.6 790.49 55.3%

2009 1,005.6 545.21 54.2% 1,201.7 672.20 55.9%

Source: China Investment Promotion Agency.

Exhibit 7




Chinese managers may go and work for multi-national companies, but many will also return and work for Chinese

companies, or establish their own start-ups, using the skills they have acquired and pass-ing them on to others in

the process. Openness has also brought foreign goods to China, which in turn has encouraged Chinese companies to

Exports of Top 25 FIEs in China, 2005–2006 (Amounts in Millions of U.S. $)

2006

Rank Company 2005 2006

1 Foxconn Precision Industry (Shenzhen) 14,474 18,264

2 Mingshuo Asus (Suzhou) 6,212 9,567

3 Motorola (China) Electronics 6,451 6,174

4 Nokia Shouxin Mobile Telecommunications 3,503 5,912

5 Invetec Technology 4,199 5,688

6 Shenzhen Futaihong Sophisticated Industry 1,049 4,687

7 Renbao Computer Industry (China) 730 4,556

8 Dagong (Shanghai) Computer 3,363 4,484

9 Tech-Front (Shanghai) Computer 4,039 4,083

10 Samsung Electronic (Suzhou) Semiconductor 3,538 4,076

11 Lenovo Information Products (Shenzhen) N/A 3,878

12 Hangzhou Motorola Mobile Telecommunication Equipment 1,311 3,789

13 Daye (Shanghai) Computer Technology 3,238 3,355

14 Weichangli Industry 1,585 3,342

15 Innocom Technology (Shenzhen) 1,532 3,072

16 Fujian Jielian Electronic 2,336 2,907

17 Beijing Sony & Ericsson Putian Mobile Communication 2,302 2,822

18 Intel Technology (China) 2,490 2,770

19 Youda Wire and Cable (Suzhou) 1,831 2,319

20 Dell (Xiamen) 2,434 2,306

21 Benq Corp. 2,363 2,157

22 China Offshore Petroleum (China) 2,368 2,153

23 Renbao Information Technology (Kunshan) 2,376 2,144

24 Tianjin Samsung Telecom Technology 1,178 2,054

25 Yinghuada (Shanghai) Technology N/A 2,025

Source: China Investment Promotion Agency. N/A = Not available.

Exhibit 8




expansion of industrial output by FIEs had a profound impact on the Chinese national indus-trial outputs. In 2008, industrial outputs by FIEs accounted for 29.5 percent of the Chinese national total.

According to the 2009 edition of China Statistical Yearbook, in 2008, the average number of employees for all FIEs in China was about 25.8 million. Most of the FIE employ-ees can be found in the coastal provinces. Guangdong Province had the most, with 9.2 million employees; Jiangsu had 4.4 mil-lion, while Zhejiang had 2.2 mil-lion. In 2008, the total industrial output of all FIEs was 14,979 billion yuan (or about $2,157 billion).

CHINA’S FOREIGN EXCHANGE RESERVE AND CURRENCY ISSUES

In China, international trade is closely tied to FDI, because about 55 percent of the nation’s imports and exports are con-ducted by FIEs. As FIEs expand their trade with foreign coun-tries, China’s foreign trade also increases significantly. In 2008, China became the second-largest exporter, with $1,428 billion of merchandise exports. Germany’s exports in 2008 were $1,462 bil-lion, slightly higher than that of China. U.S. exports in 2008 were $1,287 billion. In 2008, China’s imports were $1,133 billion. Most industrial countries were hurt by the global financial crisis and recession in 2009. China’s exports declined to $1.2 trillion, while Germany’s exports suffered a sharp drop to about $1.1 trillion, or 798 billion. The U.S. mer-chandise exports for 2009 were $1,057 billion. As a result, China became the world’s largest mer-chandise exporter in 2009.

of its national outputs. Eighteen years later in 2008, the national industrial output expanded significantly to 50,745 billion yuan, while the industrial output of FIEs skyrocketed to 14,979 billion yuan. In other words, from 1990 to 2008, China’s industrial output increased by 26 times, and the industrial out-puts by FIEs increased by 332 times during the same period. It is safe to conclude that the

produce their own ver-sions. (p. 40)

Exhibit 9 provides further evidence of the expansion of national industrial outputs and the role played by FIEs in China. In 1990, China’s national industrial output was about 1,970 billion yuan, and the industrial output by FIEs in 1990 was 45 billion yuan, accounting for only 2.3 percent

Industrial Outputs by FIEs as a Percentage of National Indus-

trial Outputs* (Value of Outputs in Billions of Chinese Yuan)

Year

National Industrial

Outputs

Industrial Outputs

by FIEs Share %

1990 1,907 45 2.28

1991 2,314 122 5.29

1992 2,915 207 7.09

1993 4,051 370 9.14

1994 7,687 865 11.25

1995 9,197 1,315 14.30

1996 9,960 1,508 15.14

1997 5,615 1,043 18.57

1998 5,820 1,416 24.34

1999 6,378 1,770 27.75

2000 7,396 2,315 31.29

2001 9,475 2,652 27.98

2002 10,120 3,377 33.37

2003 12,831 4,602 35.87

2004 18,722 5,885 31.43

2005 24,963 7,840 31.41

2006 31,563 9,942 31.50

2007 40,449 12,504 30.91

2008 50,745 14,979 29.52

Source: China Investment Promotion Agency. *Average U.S. dollar–Chinese yuan exchange rates for 1990 to 2008 can be found in Exhibit 10.

Exhibit 9




Indian and Brazilian central bank presidents also joined the United States in urging appreciation of the Chinese currency, the renminbi.

Perhaps this is a good time to review the value of the yuan versus that of the U.S. dollar over the last 30 years. Exhibit 10 shows the U.S. dollar versus the Chinese yuan average exchange rates from 1980 to 2009. These data were published in the 2009 edition of the China Statistical Yearbook. As shown in Exhibit 10, the exchange rate was 1.50 yuan to one U.S. dollar in 1980. The Chinese yuan gradually depreciated against the U.S. dol-lar from 1981 to 1993. In 1994, after a substantial devaluation, the yuan was pegged at a rate of 8.6212 to one U.S. dollar. From 1995 to 2005, the yuan was traded at a rate of 8.2 to 8.3 to one U.S. dollar. From 2005

one U.S. dollar. According to a Wall Street Journal report, many U.S. officials, members of the U.S. Congress, and other com-mentators see the steady increase in China’s reserve as evidence of China’s efforts to lower the value of its currency, to the dis-advantage of trading partners. In a speech given to the public in early March 2010, President Obama urged China to move to a “market-oriented exchange rate that would make an essen-tial contribution to that global rebalancing effort.” In a letter to the Treasury Department in mid-March 2010, 130 members of Congress demanded that “unless China lets the Yuan rise in value, the U.S. should impose tariffs on Chinese goods.” In a meeting of finance ministers and cen-tral bank heads from the Group of Twenty (G20) countries in Washington, D.C., in April 2010,

China’s imports in 2009 were about $1 trillion. The United States was the largest importer in 2009 with imports of $1,558 billion.

As China has expanded its foreign trade in recent years, the country has also accumulated a substantial trade surplus and foreign exchange reserve. For example, from 2005 to 2009, China’s total trade surplus was about $1.03 trillion. At the end of 2009, China’s foreign exchange reserve was about $2.4 trillion, the largest among all countries. China’s substantial trade surplus with the United States over the last five years and China’s rapid accumulation of foreign exchange reserve have become contentious issues in its relations with the United States. In March 2010, China main-tained its currency, the yuan, at a fixed rate of about 6.83 to

U.S. Dollar–Chinese Yuan Average Exchange Rate, 1980–2009

1.501.70

1.89 1.98

2.32

2.9366

3.45283.7221 3.7221 3.7651

4.7832

5.32335.5146

5.7620

8.6187

8.2985 8.2770 8.2768 8.19177.9718

7.6040

6.9451 6.9451

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

- 200

0

2001

-200

320

0420

0520

0620

0720

0820

09

Yuan

Exchange rate(Yuan per US$)

Exhibit 10

Source: China Statistical Yearbook, various years.




related to China’s operations, and some transactions may involve holding companies in an offshore tax haven. U.S. and China tax authori-ties have become very expe-rienced in tax and transfer pricing investigations. Many governments have worked together to combat trans-fer pricing manipulations. Transfer pricing regulations in China will also be more detailed and sophisticated in the future.Merger-and-acquisition • (M&A) strategies: More M&As will be conducted by multinational companies to start or expand their Chinese operations. Companies will need to be more careful in selecting M&A targets and studying the new regulations for M&As and anticompeti-tive practices.Hedging and other strate-• gies to minimize foreign exchange risk: It is expected that the Chinese government will adopt a gradual appre-ciation policy for their cur-rency in the not-too-distant future.

In conclusion, China is a rapidly growing economy and a large changing consumer market that requires frequent review of all aspects of management and investment strategies. However, U.S. firms and other multina-tional companies that have the patience and effective product and management strategies will be able to meet the challenges in China’s market in the future.

REFERENCE

Tse, E. (2010). The China strategy: Harness-ing the power of the world’s fastest-growing economy. New York: Basic Books.

United States, Japan, Taiwan, and Singapore. In recent years, many multinational companies have also invested in China through their holding companies in some tax havens such as the Virgin Islands, the Cayman Islands, and Western Samoa.

Coastal provinces are the most popular locations of FDI in China. The provinces of Guang-dong, Jiangsu, Fujian, and Shan-dong and the city of Shanghai have received large amounts of FDI in recent years. About half of the FDI was invested in manu-facturing, while 20 percent was in real estate; the finance indus-try attracted another 10 percent of the projects.

FDI and FIEs in China will continue to play an important role in China’s economy in the future. Many U.S.-based mul-tinationals are very successful in China. Examples include McDonald’s, Dell, GM, Wal-Mart, and many others. In the future, U.S. investors need to review or revise their strategies in the following areas to con-tinue to do well in China:

Marketing and product • strategies: This is because China’s market will become more diversified, more sophisticated, and multi-tiered. One key reason is that the pace of urbanization will accelerate in the future. In the 1990s, about three-quar-ters of the population lived in rural areas. Currently it is 50-50, evenly divided. By 2020, Edward Tse predicted that 60 percent of the people will live in cities and urban areas.Transfer pricing strategies• : In the future, there will be more intracompany trade among sister companies

to 2009, the Chinese govern-ment revalued the yuan by about 18.2 percent. At the beginning of 2010, the yuan was traded at a rate of 6.8282 to one U.S. dol-lar. In summary, the exchange rate between the U.S. dollar and the Chinese yuan has fluctuated substantially over the last three decades. China is the largest economy whose currency does not use a floating exchange rate. The International Monetary Fund estimated that China’s economic output in 2010 will be more than $5 trillion, or about 9 percent of the world’s total output. Now China is in a strong position to move toward a more market-oriented exchange rate.

As a matter of fact, a large portion of China’s reserve is invested in U.S. Treasury secu-rities. For example, at the end of January 2010, China’s hold-ings of U.S. debt was $889 billion, and this represented a $5.8 billion decrease from the holdings in December 2009. In comparison, Japan’s holdings of U.S. debt in January 2010 were $765.4 billion. It is very unlikely that China will reduce its U.S. debt holding substantially in the future. Otherwise, it may have a rather negative impact on the U.S. economy.

CONCLUSIONS AND IMPLICATIONS FOR U.S. INVESTORS

This article explains the significant expansion of FDI and FIEs in China over the last two decades and their impact on China’s economy. FDI and FIEs have played a significant role in expanding the country’s trade and industrial output, and have pro-vided millions of jobs to Chinese citizens. Major sources of FDI in China include Hong Kong, the




Roger Y. W. Tang, PhD, CMA, CIA, is a professor of accountancy and the Upjohn Chair of Business Admin-istration at Western Michigan University. He has written papers and books in the areas of transfer pricing, mergers and acquisitions, and accounting systems in developing countries. Ali M. Metwalli, PhD, is a professor of finance at Western Michigan University. Dr. Metwalli teaches global business and intercultural communication, business policy and social and ethical environment, and financial strategy. Dr. Metwalli’s research interests are in mergers and acquisitions, the cultural cost of doing business globally, and the health care industry. Ola Marie Smith, PhD, CPA, is presently an associate professor of accounting at Western Michigan University. She teaches managerial accounting and accounting information systems. She has researched and published several articles on performance measurement in both the corporate and nonprofit arena. She received her PhD in accounting from Michigan State University in 2003. Prior to her career in academia, Dr. Smith worked for ten years in corporate management and six years in public accounting. During that time she earned an MBA and became a certified public accountant.


foreign investment: impact on china's economy

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