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Economy

Making the case for foreign investment in China

Savvy companies can highlight broad range of benefits to skeptical officials

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A Dongfeng Peugeot Citroen factory in Chengdu, Sichuan Province, China   © Reuters

The Chinese economy faces significant uncertainty. Slowing economic growth, currency outflows, rising nonperforming loans and burgeoning debt have raised concerns about a possible hard landing both inside and outside China.

At the same time, China has embarked on a series of broad initiatives to transform its economy, including the international infrastructure-centered Belt and Road Initiative, the manufacturing-oriented Made in China 2025 drive, and Internet Plus. The authorities have set ambitious plans to develop the country's consumer, service and advanced manufacturing sectors.

Staving off economic difficulties and meeting growth objectives will be a monumental task. The authorities could make their challenge much easier, however, by taking a page from China's recent history and pursuing greater cooperation with foreign investors.

In 2016, China received around $125 billion in foreign direct investment; it has received in the order of $1.8 trillion in such inflows since 1980. While these numbers seem large, in recent years foreign direct investment has represented around 3% of gross capital formation in China and investment in fixed assets by foreign-invested enterprises (FIEs) has equaled around 1% of the country's total. Such statistics, combined with views that foreign companies reap too much profit in China and behave inappropriately, and that the country should expand its control of key industries and technologies, have contributed to a widely reported pushback against foreign companies in recent times.

An analysis by Enright, Scott & Associates and the Hong Kong-based Hinrich Foundation over the last 16 months into the value generated by inward foreign investment and FIEs in China tells a story that differs from some of the conventional wisdom.

In several advanced industries, including computers, autos and chemical fibers, FIEs account for 30-50% of assets, revenues, value added and employment in the country. Based on an economic impact analysis for 2009-13, FIEs, combined with their Chinese suppliers and consumer spending by their local employees, can be said to account for roughly a third of China's gross domestic product and 27% of national employment.

Other impacts of foreign direct investment in China are harder to quantify. These include modernizing local industries; cultivating domestic suppliers and distributors; bringing in improved technologies, including more than 1,500 foreign-funded research centers; and fostering spin-offs, including over 100 local high-tech companies founded in Beijing alone by former FIE employees. FDI is also encouraging improved business practices, especially in regard to accounting and manufacturing standards; providing access to international capital markets for companies such as Tencent Holdings and Alibaba Group Holding; modernizing management training and education through the introduction of business schools and corporate universities; creating demand for high-level services by moving regional and global management teams to China; promoting legal and institutional reform; and improving environmental and sustainability practices and reporting. Taken together, these may be even more important than the quantifiable impacts of foreign investment, and their importance shows no sign of diminishing.

Ripple effects

Case studies of individual cities and companies show the remarkable impact of foreign direct investment. Two-thirds of Shanghai's industrial output and 90% of its high-tech output come directly from FIEs. Some 20% of Shenzhen's GDP comes directly from the net exports of FIEs, while more than half its output can be traced to foreign investment, FIEs and their ripple effects through local supply chains. FIEs took Chongqing from producing no personal computers to producing more than one-third of the world's laptop PCs in just six years. Procter & Gamble, through its Chinese investments, operations, supply chains, downstream distribution channels and consumer spending by staff supported around $11 billion in GDP and over 600,000 jobs as of 2014.

The findings indicate that the introduction of foreign investment and FIEs into China has been an enormous success for the nation. Over the last 35 years, they have been important contributors to each stage of the country's economic development.

There is little reason to think the case should be different for the future. There remains substantial scope for China to open further to foreign investment without losing sovereignty or control. Its legal, regulatory and administrative regimes are far more advanced than they were in the early days of economic opening, and Beijing is fully capable of dealing with inappropriate behavior by foreign as well as indigenous companies. Carrying out the Belt and Road Initiative, Made in China 2025, Internet Plus and the other initiatives that are projected to propel China forward in a financially and environmentally sustainable way will be far easier with the cooperation of foreign companies and expertise. The country's own companies are also likely to find a much warmer reception overseas if foreign companies feel welcome in China.

While China can build on its past success in dealing with foreign direct investment and FIEs, foreign companies, governments and business groups need to get better at demonstrating the value that they bring to the country. Only a handful of such organizations are using sophisticated analysis to make the case for the benefits of foreign investment. Without a clear demonstration of past and potential benefits, beyond simple investment and employment totals and corporate social responsibility activities, it is unlikely would-be investors will get the hearing they believe they deserve.

It would be ironic if China were to turn away from a proven source of economic dynamism and if foreign businesses were to lose out on opportunities because neither side has fully understood the benefits that foreign investment has already brought and could bring in the future.

Michael J. Enright is professor of strategy and international business at the University of Hong Kong and director of Enright, Scott & Associates consultancy. He is the author of "Developing China: The Remarkable Impact of Foreign Direct Investment" (Routledge, 2017).

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