China dangles fresh lure for FDI

By one count, at least 480 of the world’s top 500 companies are invested in China. But in a still depressed global climate, what will be the outlook for foreign direct investment into the country, this year, and will Chinese companies continue their aggressive march abroad?

At first glance, the picture seems gloomy. Foreign investment into China will necessarily be affected by global economic stress. Companies in developed economies, that were the main sources of foreign investment, will continue to cut back. Strong European investment in China is unlikely, even as US recovery remains painfully slow and Japan’s economy has entered a new downturn. This means no serious increase in investment levels into China this year. As of now China’s inward foreign direct investment has managed to outperform the global average, declining only 3 per cent in the first half of 2012, against USA’s 39 per cent and India’s 43 per cent.

The volume of foreign funding, however, is not particularly crucial for China right now. The economy has undergone a sea change since it first opened up three decades ago as an investment-starved nation. China is cash-rich now with an ever-obliging state ready to hand out subsidies. The financing role of multinationals has lost its importance and China needs foreign participation only to build its technological muscle.

Adapting to changing times comes easily to Chinese policymakers who have swiftly changed regulations to force foreign companies to shift gear from a financing source to a provider of the next-generation technology. Since 2007, China has been restricting foreign investment in low value goods such as clothing and textiles. In 2011, it pushed forward, weeding out foreign funds from polluting sectors and focusing on cutting-edge technology. FDI into industries such as automobiles, coal and chemical plants was no longer encouraged. In contrast, industries such as new energy, internet equipment and biotechnology were moved into the ‘encouraged’ category, making them eligible for a whole range of incentives and subsidies.

Rising tide

Strong-arm tactics, however, can hardly force multinationals to part with investment and patented knowledge. The question is, will China continue to make itself attractive to foreign companies and frame, what many like to call a ‘win-win’ formula, in the new year? The most compelling factor remains the absolute increase in the size of China’s market in dollar terms — which has grown at a faster rate than the US each year since 2007. As incomes increase in this swiftly urbanising country, Chinese consumers are demanding increasingly sophisticated products and the numbers speak for themselves.

For the first time, consumption contributed to more than 55 per cent of economic growth in the first three quarters of 2012, exceeding investment figures of 50.5 per cent. In 2011, China’s spending on consumption stood at $3.48 trillion (Dh12.79 trillion), and while this seems enormous, it is still one-third of the United States. Per capita consumption level in China is exceedingly low with immense room to move up and it is this very potential that will keep China an extremely alluring location.

The market size has also forced foreign companies to establish their research and innovation centers here, much to the satisfaction of policymakers. The 480 Fortune 500 companies that are based in China, have set up 1,400 research and development centres here, focusing on research geared to the needs of the local market. The country has come a long way in its relationship to foreign companies. In the early stages, multinationals regarded China merely as a manufacturing base of goods meant for export. It has now graduated not only to building research and innovation hubs but Chinese cities are also turning centres for their global decision making.

Overseas bound

Comparatively, China’s own outbound investment experience remains immature, although it has been growing in scale. Since 2008, outbound direct investment has expanded rapidly and China now has the fifth-largest volume of outbound capital flow. Between January to November 2012, Chinese investors pumped direct investment worth $62.53 billion into 3,596 foreign companies in 130 countries. This volume, however, is meagre compared to other developed countries.

Manufacturing and energy resources sectors remain the primary choice of many outbound Chinese companies, especially the state owned enterprises. China’s manufacturing industry faces severe branding problems as also access to high-end markets. Acquiring foreign companies to gain new technology and to link up with well-known brands is seen as a practical way for domestic manufacturers to go global. The only hitch is that Chinese companies must contend with increasing political resistance abroad.