The Impact of U.S. Foreign investment and U.S. Companies on China’s Economy
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. This white paper summarizes the results of a project on the impact of US companies on China’s economy sponsored by the Hinrich Foundation and undertaken by Enright, Scott and Associates (ESA).
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 for foreign companies to “make the case” for the benefits they bring to China.
Among the papers conclusions:
- Official US Foreign Direct Investment (USFDI) 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 foreign direct investment (FDI) flows. 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.