Foreign direct investment

The impact of US FDI in China

Michael Enright

Published 05 July 2017 | 5 minute read

Our white paper - The impact of U.S. foreign investment and U.S. companies on China’s economy - summarizes the results of a project on the impact of US FDI in China and US companies on China’s economy. The research was undertaken by Enright, Scott and Associates (ESA) and sponsored by the Hinrich Foundation.

China’s economic reforms have created the world’s most dynamic economy. A major part of China’s economic development has involved foreign companies, and in particular companies from the United States.

In recent years, there have been positive and negative signs when it comes to China’s approach to foreign companies. American businesses report that protectionist policies, unclear regulations, policies that favor domestic companies, stalled reforms and what some termed selective enforcement of laws against US and other foreign companies (or at least the reporting of incidents) have made many US companies feel unwelcome in China.

At the same time, China has become gradually more open, pronouncements by senior Chinese leaders indicate that they wish continued cooperation with foreign firms, and the Draft Foreign Investment Law has several features long-desired by foreign companies. China is at a crossroads when it comes to its approach toward foreign companies, and it is unclear whether major Chinese initiatives will be largely inclusive or exclusive when it comes to foreign companies. Thus it is more important than ever before to review the impact to date of US FDI in China and for foreign companies to “make the case” for the benefits they bring to China.

Among the paper's conclusions:

Official US FDI in China numbers are likely to be substantially understated because they do not capture all investments made through third countries or economies.
Economic impact analysis gives a much more complete picture of the benefits of foreign enterprises than the analysis of the flows of US FDI in China. The economic impact of US Foreign Affiliates (USFAs) in China in a given year has been as much as 180 times the investment flow. This is where the discussion about the impact of US companies in China should start, with the economic impact estimates, not with the USFDI figures.
China benefits far more than US companies from their presence in China, since the GDP impact of US companies, suppliers, distributors, and the relevant employees in China in a given year is on the order of 11 times their net income.
The economic impact analysis tools can be used in other countries to provide a more complete picture of the benefits of FDI and foreign companies.

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