FDI in China
The Hinrich Foundation is pleased to announce the publication of a new book by Michael J. Enright that analyses the impact on China’s economic development of foreign direct investment. For the first time, using Economic Impact Analysis and econometric modelling, the book estimates that the impact of foreign investment is far larger than is generally understood, and that most multinational companies vastly underestimate their own impact on China’s economy.
One of the most important features of China’s economic emergence has been the role of foreign investment and foreign companies. The importance goes well beyond the USD 1.6 trillion in foreign direct investment that China has received since it started opening its economy. Using the tools of economic impact analysis, the author estimates that around one-third of China’s GDP in recent years has been generated by the investments, operations, and supply chains of foreign invested companies. In addition, foreign companies have developed industries, created suppliers and distributors, introduced modern technologies, improved business practices, modernized management training, improved sustainability performance, and helped shape China’s legal and regulatory systems. These impacts have helped China become the world’s second largest economy, its leading exporter, and one of its leading destinations for inward investment.
The book provides a powerful analysis of China’s policies toward foreign investment that can inform policy makers around the world, while giving foreign companies tools to demonstrate their contributions to host countries and showing the tremendous power of foreign investment to help transform economies.
The book is based on a project commissioned by the Hinrich Foundation and conducted by Enright Scott & Associates.
In 2015, Hinrich Foundation engaged Enright, Scott and Associates led by Prof Michael J. Enright to undertake a major research effort to identify the impacts of FDI on China. It is generally acknowledged (although less by China these days) that the economic development of China owes some of its success to the foreign direct investors who developed industries in China over the last 30 years. This project set out to measure the actual impact that FDI has had (and continues to have) on China. The project produced a number of comprehensive research reports which are shared here:
FDI literature review
There is an extensive academic literature on the impact of foreign investment on China’s economy. This literature differs greatly from work that compiles and reports statistical data on the amounts of foreign investment in China. It differs substantially from the individual company stories, anecdotes, and case studies found in the business press. It also differs considerably from the surveys of foreign companies that focus on the opportunities and challenges faced by foreign firms operating in China. This literature is important in that it tends to shape much of the discussion and debate about foreign investment that goes on in policy circles in China and in influential think tanks around the world. In addition, a number of the people who write in this area are likely to be called upon by government as advisors. Thus it is crucial for anyone interested in the impact of foreign investment in China, or interested in the types of analysis and discussion that can influence policy toward foreign investment behind the scenes in China, to understand this literature. It is also vitally important that foreign governments, think tanks, and companies that are interested in China or operate in China understand this literature in order to understand Chinese approaches and policies toward foreign investment and how these might evolve in the future.
FDI policy summary
This document briefly summarizes the evolution of China’s policies toward foreign investment into the country. It then traces the history of inward investment into China by compiling a variety of statistics concerning foreign investment into China, the importance of foreign investment to capital formation and trade in China, and breakdowns of foreign direct investment into China by origin, industry, province, and city. The document then reports a unique analysis of the impact of foreign investment on China’s economy, and end with a set of conclusions summarizing the earlier sections of the document.
In this document, we undertake a series of econometric tests of the influence of foreign investment on various aspects of China’s economy. The goal is two-fold. First, to perform similar tests as have been found in the academic literature on the impact of foreign investment in China in order to see if those results stand up to changes in the variables employed, the specific formulations used, and the time periods studied, or whether the published results are in some ways dependent on the specifics of the variables employed, formulations used, and time periods studied. Second, we test our own formulations of relationships between foreign investment and key aspects of China’s economy in order to add perspectives to the existing literature. The main reasons for these approaches is that the econometric literature on the impact of foreign investment in China can be influential in terms of policy making within China, and that there are some contradictory and counter-intuitive results in the existing literature that have been described in the literature review for another Phase of the current project.
Using a unique economic impact analysis, Professor Michael J. Enright quantifies – for the first time – the remarkable impact of foreign direct by foreign invested enterprises (FIEs) on China’s economic development.
This four-page infographic highlights a number of the key data points from “Developing China: The Remarkable Impact of Foreign Direct Investment”, including FDI impact on China’s GDP and employment, as well as some of China’s major cities and industries. It also describes key benefits of foreign investment that are often difficult to quantify. Download now for a copy of the full infographic.