FDI in China

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FDI in China

• Ing. Tomá Dudá, PhD.

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China Basic Information

• 1,33 billion inhabitants
• GDP 7,1 billion USD (PPP)
• GDP/c 5 300 USD (PPP)
• GDP growth in 2007 11,4
• Labor force 803 million
• Sector employment 43-25-32
• Unemployment 9,8 ????
• Poverty 8 of the population live below the
  poverty line

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China important milestones

• 1949 The creation of Peoples Republic of China
• 1946-1976 The reign of Mao Zedong, which could be
  described by very strict communist policies
• 1978 The start of economic reforms
• 1989 Tienammen square massacre
• 2001 Chinas WTO accession

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FDI in China after 1978

• 1978 bad economic conditions (dual society,
  where the urban population had 3x higher income
  than the rural population)
• Economic pragmatism the ideological background
  was not important
• Gradualism slow and gradual changes
• 1978 law about joint ventures

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FDI in China after 1978

• 1980 the creation of 4 special economic zones
  Shenzen, Zhuhai, Shantou and Xiamen
• 1984 14 coastal cities were opened to the
  foreign investors
• The government continued to add more special
  economic zones, export processing zones and
  technological parks
• Main problem the Tienammen square massacre, but
  the FDI begun to grow dynamically in 90s
• Up to 2000 China received FDI in amount of 395
  billion USD in more than 363 thousand projects
• From 1985 85 of the FDI received came into
  the special economic zones

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FDI in China after 1978

• Before 1990 the major part of the FDI originated
  from Chinese living abroad (Between 1976 and 1996
  57 of the FDI inflow originated from Hong Kong
  and Macao)
• Current estimates - HK a Macao 40, USA 11, EU
  11, Japan 8, ASEAN 8, Taiwan 6, Other 16
• Some problems with the identification of the
  origins of the FDI
• Problem the dominant position of eastern China
  that received up to 2000 around 87 of the total
  FDI

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Sektoral structure of FDI inflows between 1976
and 2000

• Agriculture 1,5
• Industry 58,7
• Services 39,8

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The main factors of the FDI inflows

• Large internal market with growing purchasing
  power
• Low cost labor force (approx. 1/3 of the costs in
  Mexico and 1/20 of the costs in USA)
• Growing labor productivity
• Generous state support of FDI inflows (financial
  incentives, infrastructure, special economic
  zones)

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Table 1 Annual Foreign Direct Investment in
China, 1979 2002 Year                      
FDI, utilized  (US billion)              Number
of Projects 1979-82              
                    1.77                         
                                             
920 1983                                       
    .92                                           
                            638 1984              
                            1.42                  
                                                  
   2166 1985                                      
    1.96                                          
                             3073 1986            
                             2.24                 
                                                  
     1498 1987                                    
      2.31                                        
                               2233 1988          
                               
3.19                                              
                         5945 1989                
                          3.39                    
                                                  
5779 1990                                       
  3.49                                            
                           7273 1991              
                            4.37                  
                                                  
   12978 1992                                     
   11.01                                          
                             48764 1993           
                             27.52                
                                                  
     83437 1994                                   
     33.77                                        
                               47549 1995         
                               37.52              
                                                  
       37011 1996                                 
       41.73                                      
                                
24556 1997                                       
45.26                                             
                          21001 1998              
                          45.46                   
                                                  
  19799 1999                                      
  40.32                                           
                            16918 2000            
                            40.72                 
                                                  
    22347 Total                                   
    395.3                                        
                           363,885
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Impact of the FDI inflows on the Chinese economy

• FDI inflow supports GDP growth 1 increase in
  the FDI inflows leads to 0,05 of GDP growth
• Economic analyses show that currently FDI inflows
  contribute to the GDP growth by more than 20
• Export growth from 10 bln. USD in 1978 to 125
  bln. in 2000
• Companies with foreign ownership have a 50
  share on the total exports
• The export structure of the companies in foreign
  ownership is more modern than the export
  structure of the domestic corporations

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Impact of the FDI inflows on the Chinese economy

• In 1995 corporations with foreign ownership
  employed around 10 million employees
• In 1998 it was already 17,5 millions and current
  estimates are around 25-30 millions
• Analyses say that every 10 000 USD invested
  created a new workplace
• FDI inflows had a huge positive impact on Chinas
  trade balance and currency reserves
• New technologies and managerial know-how
• The regions opened to foreign investors develop
  very rapidly
• FDI played an important role in the fight against
  poverty

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Volkswagen in China case study

• VW wanted to globalize the company, so they begun
  the talks with the Chinese government in 1978
• State owned enterprises dominated the Chinese
  automotive industry those times (ex. FAW) but
  low production
• 1978 55 assembly lines with an annual capacity
  of 150 thousand cars
• In the early 80s the government made a decision
  automotive industry should be one of the main
  pillars of the economy
• 1984 Joint venture between VW and Shanghai
  Automobile Industry Corporation (SAIC)
• VW invested 40 million USD in 1984 and 85 million
  USD more in 1985

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Volkswagen in China case study

• VW needed China because it had a weak position
  outside Europe
• In 1995 the joint venture produced only 5 200
  cars (model Santana) build from imported
  components
• The JV was profitable also for the Chinese
  partner SAIC was paying 18 800 USD for one car
  and was selling it for 37 600 USD on the market
• 1987 the start of a new phase with more and
  more local subcontractors
• 1993 production surpassed 100 000 cars per year
• Currently the competition on the market is very
  strong VW has to fight for its position on the
  market

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