Foreign Direct Investment

in China

Dr. HE Rong
Associate Professor
School of International Business,
BFSU
rhe@vcu.edu
Mar19, 2009
1
Outline
 Definition of FDI
 FDI (Foreign direct investment) in
China
 Several important strategies for
business success in China

2
Recommended websites
 www.english.mofcom.gov.cn/
 www.fdi.gov.cn
 www.stats.gov.cn

3

Since China's adoption of an
"open door" policy and
economic reforms beginning in
1978, international trade and
inward foreign direct
investment (FDI) have played a
key role in its rapid economic
development.

4
1. Definition
 Foreign Direct Investment (FDI)
-----an investment involving a long-
term relationship and reflecting a
lasting interest and control of a
resident entity in one economy
(foreign direct investor or parent
enterprise) in an enterprise
resident in an economy other than
that of the foreign direct investor
(FDI enterprise or affiliate
enterprise or foreign affiliate). 5
Strategic motives for FDI
 Resource seeking FDI
 Market seeking FDI
 Efficiency seeking FDI
 Strategic asset seeking FDI
 Other motives for FDI

6
Resource seeking FDI
 To seek physical resources
including labour and intangible
resources.
 Search for lower production costs

Example: labour, natural resources

 Nike, Sony and Toshiba

7
Market seeking FDI
 To seek to sustain and protect
existing markets, and exploit and
promote new markets.
 To follow suppliers and customers

or obtain host government

concessions and circumvent trade
barriers.
 Example. Coca-Cola, Nokia,

Motorola 8
 Efficiency seeking FDI
 To rationalise the structure of established
resource-based or market-seeking
investments in such a way that the
investing company can gain from the
common governance of geographically
dispersed activities.
 Two types of division of labor:
developing and developed countries;
or developed countries with same
income level;
 to enjoy economies of scale.
Example: Automobile industry
9
 Strategic asset seeking
FDI
 To pursue an integrated global or
regional strategy.
 Two types:
--Protective type strategic seekers
(e.g., accounting firms)
--expansionary MNE (e.g. toy
manufacturing)

10
Other motives for FDI
 Escape investments, to circumvent
restrictions on the share of
domestic production that MNEs
might obtain.
 Support investments, an affiliate or
branch office activity is a first step
towards setting up a market-or
resource-seeking FDI.
 And etc. 11
12
2. FDI in China
 The genesis of FDI policy
 Overview of foreign investment
 FDI’s role in China’s economy

13
 (1) The genesis of FDI policy
 FDI as part of the process of opening
up and economic reform-- Deng
Xiaoping's open-door policy.

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15
Initial success: FDI in 1980s

----Investment from Hong Kong,

Macao, Taipei
--geographical distribution:
Guangdong, SEZs;
--sector distribution: hotel; labor-
intensive export manufacturing

16
Entrenchment of FDI in the
1990s
 geographical distribution
 sector distribution: manufacturing
 Source of investment has changed,
more and more investment came
from OECD countries.

17
 WTO entry: New phase in opening up
On Dec 11th 2001, China acceded to the
WTO.
 Widen the scope of operation of
FIEs ; Opening up of services
sectors
 Distribution and trading rights of
FIEs
 Revision of catalogues(encouraged;
permitted; restricted; and
prohibited; 2005)
 National treatment 18
 TRIMs (Trade-related investment
measures); trade performance,
trade balancing, local content
requirement were abolished
 new foreign bank licensing
regulations

…..more fields will be open to the

foreign
Investors after 2006 19
 (2) Overview of foreign
investment
 China was the largest developing
country recipient of FDI, and the
fourth largest recipient of FDI in the
world, after the United States, the
United Kingdom and France.

20
 Total accumulated FDI (realized
value) rose from US$1.8 billion in
1982 to US$750 billion in 2007.

 By contrast, FDI outflows have,

until recently, been relatively low,
reaching only US$5.5 billion in
2004, for an accumulated total of
US$100 billion. 21
 year No. of Contractual Realized value
projects value US$100million
1979-1982 920 49.58 17.69
1983 638 19.17 9.16
1984 2 ， 166 28.75 14.19
1985 3 ， 073 63.33 19.56
1986 1 ， 498 33.30 22.44
1987 2 ， 233 37.09 23.14
1988 5 ， 945 52.97 31.94
1989 5 ， 779 56.00 33.93
1990 7 ， 273 65.96 34.87
1991 12 ， 978 119.77 43.66
1992 48 ， 764 581.24 110.08
1993 83 ， 437 1114.36 275.15
1994 47 ， 549 826.80 337.67
22
year No. o f Con tr act ual Rea li zed va lu e
pr oj ec ts val ue
1995 37 011 913 37 5
1996 24 556 733 41 7
1997 20 001 510 45 3
1998 19 799 521 45 5
1999 16 918 412 40 4
2000 22 374 624 40 7
2001 26 139 691 .1 468. 5
2002 34 171 827 .7 527. 4
2003 41 018 1150 .7 535. 0
2004 43 664 153 4. 8 606. 3
2005 - - 724. 06
2006 - - 694. 68
2007 - - 750. 00
2008 - - 923. 95 23
 By the end of 2006, the cumulative
realized FDI value reached US$
703,974 million.

 By the end of 2006, 594,445 foreign

invested enterprises (FIEs) have
registered in China.
 Over 480 out of top 500
multinational
companies have entered China. 24
 A. Changing form of FIEs
 Two major modes :
-- contractual joint venture and equity
joint venture;
-- wholly-foreign-owned enterprises

-- joint exploitation of natural resources

--foreign-invested shareholding
enterprises
--others, e.g. build-operate-transfer
(BOT)… 25
 In the early stages of economic
reform, equity joint ventures were
preferred.

 Since 2000, the number of wholly

owned subsidiaries established has
exceeded that of joint ventures.

26
 Cross-border mergers and
acquisitions started to emerge in
1990s.
 Cross-border mergers and
acquisitions—sale to the foreign
companies
1990-2000 (Millions
2004of dollars)
2005 2006
Annual
average
339 6378 8253 6724
27
Example: IBM China
 Began with agency arrangement, then joint
venture for over ten years;
 IBM China was established as a Wholly
Foreign Owned Enterprises in 1992.
 Now use a mix of WFOE an JV formats
depending on what their purpose is for a
specific project, and also where they are
operating within the country.
28
The IBM China Research
Laboratory (CRL)

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The IBM China Research
Laboratory (CRL)
  The IBM China Research Laboratory
(CRL) was established in 1995 and is
one of the eight worldwide IBM
Research laboratories.
 It is the first research laboratory
established in a developing country.
 Located in Zhongguancun Software Park
in Beijing, CRL has been growing
steadily and currently employs over 150
technical staff members. 30
 B. Sources of FDI inflows into
China
 By the end of 2006, investment
from the top Five accounted for
70% of the total actually utilized
value.

Hong Kong, Japan, U.S, Taiwan,

South Korea.

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 Top ten sources of FDI in 2006 and 2008(100 Million US$)
No Nation or region Value in Nation or region Value in
2008 2006
1 Hong Kong 410.36 Hong Kong 202.32
2 British Virgin 159.54 British Virgin 112.48
Islands Islands
3 Singapore 44.35 Japan 45.98
4 Japan 36.52 South Korea 38.95
5 Cayman Islands 31.45 U.S 28.65
6 South Korea 31.35 Singapore 22.60
7 U.S 29.44 Taiwan 21.36
8 Samoa 25.5 Cayman Islands 20.95
9 Taiwan 18.99 Germany 19.79

10 Republic of 14.94 Samoa 15.38

Mauritius 32
 C. Regional distribution of
FDI
 Eastern China has received over 80
Percent of FDI.
--eastern; central; western
--top five provinces or
municipalicities (including Beijing,
Tianjin, Shanghai, Chongqing)
enjoying the most actualized foreign
investment: Guangdong, Jiangsu,
Fujian, Shanghai, Shandong, .. 33
 Region Accumulative actualized foreign
investment (by the end of 2006)

Eastern China 86.05%

Central China 8.86%

Western China 5.09%

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 Special economic zone: Shenzhen,
Zhuhai, Shantou, Xiamen and Hainan
 Open coastal cities: Dalian,
Qinhuangdao, Tianjin, Yantai, Qingdao,
Lianyungang, Nantong, Pudong Area of
Shanghai, Ningbo, Fuzhou, Guangzhou,
Zhanjiang, Beihai and so on.
 Economic and technological
development zones (54): Dalian, Tianjin,
Ningbo, Beijing and Harbin…
 Export processing zones (57)
 State-level High-tech industrial
development zones( 53) 35
 D. Industry distribution of FDI
 Manufacturing remained a major
attraction to foreign investors.
 Services became another attraction.
 By the end of 2006, the cumulative
FDI value in industries:
Primary Manufacturin Services
industry g

3% 71% 26%

36
 Technology-intensive and capital-
intensive industry have absorbed
more and more FDI.
e.g.,Intel ; IBM;Motorola .

37
 By 2006, 214 operations have been set up
by 74 foreign banks and 115 of them have
been approved for RMB business.
 Total assets of these foreign-funded banks
in China have reached 120 billion USD.
 Foreign-funded banks have opened 209
representative offices in China.

 47 Foreign-funded insurance companies

have also established operations in China.
38
 (3) FDI’s role in China’s
economy
 FDI has played an increasingly important
role in the economy .

 FDI has contributed 2.7 percent of average

growth (9.7%) of GDP.
 Foreign invested enterprises has created
23,500,000 jobs directly.
 20.7 percent of the whole country’s
taxation revenue came from foreign
invested enterprises in 2005.

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 FIEs have stimulated trade
growth
import : over 50%
export : over 50%
trade deficit or surplus?

40
 The role of FDI in Chinese industry

--FIEs are far more export-oriented

than domestic producers. （ over
50% exports ）
-- Productivity of Capital and labour
productivity are clearly higher in
FIEs than in domestic industry.
--FDI has modified China's industrial
structure. 41
 Spillover to the domestic economy
--FIEs have established over 750 R&D center
in China.
--Raise the overall productivity
--New technologies diffused into the local
economy
--Human capital
--Competition

42
The controversial issues on the role
of FDI

 Monopoly?
 Threatening national economic
safety ?
 Unemployment rate?
 limited benefits from FDI--
Processing base
 Over-dependence on FIEs’
technology?
43

 An example
Value chain (R&D-processing-marketing-after-sale
service)

 The cost of the toy: Profit

$12
 the plant: 3
 The Chinese toy plant
sell at $15  Chinese Trading
Chinese Trading
company: 7

company sell at $22
 Hong Kong Trading  Hong Kong
company sell to the Trading company:
American firm: $50
 American firm sell to 28
the store at the price  American firm:
of $82
32
 US store: the toy’s  US store: 18 　　
price $100

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 Discussion
 1 Are there a lot of FIEs in your
country? what attitude do the government
and people take toward them?

2 Do you think FIEs in your country

benefit people’s life? How? Give an
example.

45
 3. Suppose you plan to invest in China,
can you list factors which will influence
your investment decisions, and which
factor do you think is most important?

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 Case 1: Volkswagen's Experience in
China

 What strategies did Volkswagen

take?
 Of all the strategies, which one do
you think is most important in
explaining its success in China?

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Some background: Volkswagen
in China
 Volkswagen was one of the first
international automakers to
venture into China. The earliest
contact dates from the year 1978.

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 The investment of Volkswagen in
China has totalled to more than six
billion Euros from 1984 to 2005.

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 The Chinese passenger car market grew
in Mainland China 2006 by a further
26.1%, expanding to 4.15 million units.
 The VOLKSWAGEN Group again leads
the Chinese passenger car market in
2006 with a share of about 17.1%.

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 The goal of the VOLKSWAGEN Group is -
despite difficult competitive conditions -
to continue its market leadership as the
most successful car manufacturer by
responding to the challenges with a
strong local manufacturing network.

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 Today, the group has 14 representative
companies in the country, undertaking
parts delivery and service provision for
both customers and industry in addition
to vehicle production.
 Shanghai Volkswagen Automotive Compan

 FAW-Volkswagen Automotive Company

 Further companies
52
Shanghai Volkswagen Automotive
Company
 Founding year 1984 (production start:
1985)
 Headquarters Shanghai

 Equity holders Volkswagen AG (40%), 

VW (China) Invest (10%), SAIC (50%)
 Employees 2006: 11,111

 Products: Passat, Touran, Polo

hatchback, Polo saloon, Gol, Santana,
Santana Variant, Santana 3000
53
FAW-Volkswagen Automotive
Company
 Founding year 1990 (production start:
1991)
 Headquarters: Changchun/Jilin province

 Equity holders: Volkswagen AG (20%),

VW (China) Invest (10%), Audi AG
(10%), FAW (60%)
 Employees 2006 : 8,847

 Products Volkswagen: Sagitar, Golf,

Bora (hatchback and notchback), Jetta,
Caddy; 54
Further companies
 Volkswagen (China) Investment Company in
Beijing
 Volkswagen Transmission (Shanghai)
Company (gear boxes),
 Shanghai Volkswagen Powertrain Company
(engines)
 Volkswagen FAW Engine (Dalian) Company
(engines)
 SAIC-Volkswagen Sales Company
 Volkswagen Import Company
 Volkswagen Finance (China) (financial
services)
 Volkswagen Beijing Center Company (sales,
service)
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 And etc.
 3. Several important strategies for
business success in China
Different views on Chinese market
 Optimistic  Pessimistic
 Enormous  macro- and
business microeconomic
opportunities risk factors
 Third-largest  Inadequate legal
national economy structure,
 Fast economic corruption,
growth unemployment,
 A large population bureaucracy…. 56
 Those preparing for an
engagement in China should take
these views into account, and
analyze both views realistically and
verify them with facts.

 Listen to the experiences of other

companies
57
Strategies suggested
 Selection of a good local partner
 Cultivating relationship
 Active adaptation and continuous
learning
 Matching product portfolio with
market needs

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 Find a right location
 Hire good local management talent
 Choose right entry mode
 Research and investigation, and good
feasibility study before entering Chinese
market

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 Example 1. LG electronics
 In 1993 LG electronics established a joint
venture in Guangdong.
 At present, it has 19 plants, 9 branch
companies, 34 marketing departments
and 10 service centers in China. ( over
34,400 employees).
 In 2002, it established a R&D center in
Beijing.
 In 2003 it’s sales in China reached US$ 5
billion.(2004, US$7 billion) 60
 Main products of LG
Main products of Market Market
LG electronics share position in
in Chinese Chinese
market market
PDP and LCD TV 17.6% No 1

Microwave oven 34% No 2

CDMA terminal 13.4% No 3
Washing machine 11% No 3
Air conditioner 7% No 3
61
 Example 2. Motorola
 Motorola Inc., a global leader in offering
integrated communication solutions and
embedded electronic solutions, was
founded in 1928.
 The company runs one of the world's
major manufacturing facilities for
communications equipment.

62
 Motorola opened a representative office
in Beijing in 1987, and set up Motorola
(China) Electronics Ltd. in Tianjin in
1992 .
 Total investment in China: US$
3.6billion (including 0.8 billion on R&D)
 Motorola has 3 wholly-owned company,
1 holding company, 5 joint venture
firms and 25 branch companies, 18 R&D
centers.
63
 Motorola's Performance in China in
2006
 Total sales: US$4.67 billion
 Total exports: US$10.09 billion
(including export)
 Total employees: 12,000(with 3,000
for R&D)

64
 Rewards & Recognition in 2002
 1. Largest foreign investor in China's
electronic industry (Source: MOFTEC)
 2. Largest foreign company in China, in
term of sales (Source: MOFTEC)
 3. The best in long-term commitment;
most innovative; best adapted to the
Chinese market; best employer in China
(Source: Fortune magazine, Chinese
edition)
65
 A good corporate citizen of
China
 1. Project Hope: donation of RMB 24 million in last 8
years; setting up 50 Hope schools in 25 municipalities,
autonomous regions and provinces; and funding 10,000
poverty-stricken children to return to school.
 2. Higher Education: providing of RMB 11 million to 12
universities as scholarship.
 3. Disaster Relief: donation of RMB 30 million; setting up
11 schools for homeless children.
 4. West China Development: donation of RMB 2 million
for the "Well-Digging" project in western China.
 5. Sports Sponsorship: Asian and National Games,
CNBA, Games for the Handicapped.
 6. Environmental Protection: "Green China" Program in
six major cities.
 7. Active support for China's bid for the 2008 Beijing
Olympic Games. Motorola's communication equipment
was used in the previous seven Olympic Games.
 8. Active support for China's entry into the WTO. 66
 The company's strategies are best
summarized as below:
 Motorola is steadfastly committed to
investing in China and transferring
technology and building local
manufacturing and R & D capabilities in
order to provide the country with
advanced communications solutions.
 The company will continue its long-term
plan to localize management in China
and to develop and train excellent local
management talents.
67
 The company will continue to work
with local companies to create a
comprehensive local supply chain.

 Promote joint ventures and

cooperative projects with local
partners to take advantage of China's
new market opportunities that result
from China's increasing integration
into the world market.
68
Thanks!

Questions?

69