Impact of Foreign Direct Investment on China's Economy

This report provides a comprehensive analysis of the role of Foreign Direct Investment (FDI) in shaping the Chinese economy. It highlights the significant economic growth experienced by China since the 2000s, driven by increased FDI inflows and outflows, which have promoted manufacturing growth, employment, and overall economic transition. The report details China's position as a leading FDI destination among developing nations, utilizing foreign capital to support infrastructural development and modernization. It discusses the impact of FDI on rural development, economic activities, and China's GDP share in the global economy. Furthermore, the report explores the determinants and attractions for FDI in China, such as geographic location, tax rates, labor market conditions, and government support. It also examines the impact of FDI on key economic indicators, including GDP growth, employment rates, and corporate growth, while also acknowledging existing barriers to FDI, like legal uncertainties and protectionist policies. The report concludes by emphasizing the crucial role of FDI in China's economic development and its contribution to the country's global economic standing.

FDI Role in Chinese Economy 1
FDI Impacts on the Chinese Economy

FDI Role in Chinese Economy 2
Abstract
The main purpose of the report is to provide a broader outlook of the FDI flows in shaping the
Chinese economic environment. In the last 17 years after the 2000s, the Chinese economy has
recorded huge economic growth due to the increased rates for the FDI flows (inflows and
outflows) to promote the manufacturing growth, employment, and economic transition.
Currently, China is a country for attracting the FDI at the most in the developing nations around
world by using the foreign capitals, foreign investments, and foreign direct investments from the
overseas firms for supporting the Chinese Infrastructural development and modernization
construction. The FDI also contributes to the development of the rural areas, enhancement of the
economic activities, and increase inthe GDP share of China in the world economy. The past three
decades after the 1990s have been meaningful for the significant FDI in China to boost the
national economy to the large extent.

FDI Role in Chinese Economy 3
Contents
Abstract.......................................................................................................................................................2
Introduction.................................................................................................................................................4
Main Discussions........................................................................................................................................5
China FDI Inflows and Outflows.............................................................................................................5
Determinant factors and Attractions for FDI in China.............................................................................6
Impact of FDI in China on the National Economic Environment (Economic Transition, GDP Growth,
Employment growth, and Corporate Growth)..........................................................................................7
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13
Appendix...................................................................................................................................................16
Appendices 1: FDI Inflows China vs. the USA.....................................................................................16
Appendices 2: China’s Inward and Outward FDI Flows.......................................................................16
Appendices 3: China’s Net FDI (1982-2015)........................................................................................17
Appendices 4: China’s Foreign Direct Investment................................................................................17
Appendices 5: FDI Impacts on China GDP and Employment Growth..................................................18
Appendices 6: Impacts of FDI on GDP growth into China....................................................................18
Appendices 7: China GDP’s Realizations and Future Projections.........................................................19
Appendices 8: Total Amount of FDI in Manufacturing and Service Sectors in China 2010-2015........19
Appendices 9: FDI Impacts on Unemployment rates in China..............................................................20
Appendices 10: China: GDP Growth Rates from 2009-2019................................................................21

FDI Role in Chinese Economy 4
Introduction
The foreign direct investment is known as an investment of a foreign company from another
geographic location (host country)into the home country through the licensing, strategic
partnerships, exporting or franchising. The FDI provides a platform for the overseas firms to
globalize the businesses through the cross-border transactions for enhancing global market share
and sales volumes, revenues, and profits. At present, China is the second largest economy in the
world and the biggest economy in Asia that has the highest GDP among the developing nations
because of the world’s second top contributor to the FDI. It majorly contributes to the global
economic growth because of the second largest percentage of share for the FDI flows in the
world behind the USA (Slide Share, 2018).
China is one of the biggest markets for the foreign investments in the world because the Chinese
government supports the FDI Inflows and Outflows to increase the GDP rates, economic growth
with low unemployment rates, low interest rates, and low inflation rates. Because of the
favorable FDI policies of the Chinese government, China attracted approximately US$139
billion FDI that is the second highest in the world after the USA. The FDI growth in China was
recorded more than 10% in the duration of Dec.2010 (US$124) - March 2018 US$139 billion.
China acquired US$ 37 billion (equal to 227.54 billion Yuan) FDIin Q1, 2018 at the increased
FDI rates of 0.5% with the foreign investment by approximately new14340 foreign firms to trade
in China(The Economic Times, 2018). This report discusses the impact of the foreign direct
investment on the Chinese economic environment, shaped from the FDI inflows in China from
the foreign investments and Outflows from the investment of the Chinese firms into the foreign
markets.

FDI Role in Chinese Economy 5
Main Discussions
China FDI Inflows and Outflows
China FDI is termed as an accumulated foreign investment in the Chinese domestic companies in
the manufacturing and service sectors for supporting the economic growth in China by utilizing
the foreign capital or FDI funds. The Chinese economy has grown at the rapid pace in the last
twenty-eight years since the 1990s because of the tremendous growth in the trade Inflows in
China from the outside investment and trade outflows by investing into the other markets by the
Chinese global exporting firms. China is one of the largest developing host nations in the world
for the foreign investments that attracted 139 billion US dollars foreign investments in December
2017 with 37 billion record FDI in the first quarter of 2018 from 124 billion US dollars in
December 2010 and only 37.48 billion US dollars in the year 2000 (Focus Economies, 2018).
The period of 2000-2010 showed a huge growth of FDI in China because of the exponential
investment growth after the 2000s.
China is a top recipient of the FDI among all developing nations to promote the economic
growth, GDP and employment growth, wealth maximization, industrial development, and global
corporate identity. Hong Kong is the major contributor to FDI inflows in China (69.0% in 2016),
it also includes FDI stocks from Singapore (5.0%), Macao (3.0%), South Korea (3.0%), Japan
(3.0%), the USA (3.0%), Germany (2.0%), UK (2.0%), and Luxembourg (1.0%) in 2016. It
accounts the FDI inflows from Manufacturing (43.2%), Real Estate (20.9%), Business Services
and Renting (6.2%), Wholesale and retail businesses (5.7%), and Telecommunications,
Transportation, storage, and postal services (2.0%) in 2016 (Fogel, 2016). The high-tech sector
FDI rose 12.8% in 2017 and accounted for 19.3% of total FDI. FDI inwards in China rose almost
15% from 123.9 in Dec. 2013 to 139 in Dec. 2017.

FDI Role in Chinese Economy 6
In the first quarter of 2018, China accounted 0.5% growth in the FDI inflows and reaching the
figure of 227.54 billion Yuan (US$ 37 billion) worth. China received almost US$122 billion in
the first 11 months of 2017. Currently, the total FDI (inward and outward) was recorded US$
286.78 in April 2018, decrease from US$ 345.1 in March 2018 and increase from US$120.74 in
January 2018. The FDI was recorded the highest of all times in China in December 2017 with the
net worth of US$ 1310.35 because of the significant amount of investment by the Chinese
Company into the outside markets around the globe(Fetscherin, Voss, and Gugler, 2010).
China’s total Outward flow continually has grown after the 2000s. It was recorded US$145.7
billion in 2015. It is projected to continually rise at the rapid rates because of the increasing
investment by the global Chinese firms into other markets outside of China for the globalization
of their business models.
Determinant factors and Attractions for FDI in China
The FDI in China is determined by the factors, like geographic locations, tax rates, labor market
conditions, unemployment rates, infrastructural support of the government, technological know-
how, and availability of the production technologies and R&D facilities. The Chinese
government majorly attracts the foreign investors for allowing them to trade directly through the
foreign investments into China by the global automakers and other manufacturing industries as
well as retailing supermarkets (Ali and Guo, 2005). The Chinese business environment has many
attractions for the FDI, like the world’s largest population base, improved labor market
conditions with lower laborrates, lower material costs, availability of research facilities,
laboratories, and technical know-how operations are such major attractions for attracting the
foreign investments into the high-growth potential conditions in China with their significant
capital funds. The government support procedure and infrastructural support in China can

FDI Role in Chinese Economy 7
provide growth opportunities to new investors to increase their global market share through the
significant Chinese investments.
The economic policies, like tax concessions, currency devaluation, and open doors policy favor
the economic development and growth by making the FDI inbound operations more attractive to
overseas firms (Zhang, 2011). The market liberalization policies, like low tariffs, reduction of
trade regulations and barriers, and investment protection and IP secured rights have enabled the
large access to FDI from the foreign firms into China. Additionally, the low political risks and
fewer possibilities of terrorist attacks, stable environment with low economic uncertainties,
industrial infrastructure, technological advantage and know-how, and skilled and technical
labors, are such attractions to more FDI inflows in comparison to other developing nations in the
world. But, the factors, like the legal uncertainties, the lack of transparency and openness to
foreign trade, bureaucratic and administrative system, FDI protectionism policies, corruptions
and protection measures, and lower level of protection of IP rights are such barriers to FDI that
promote only local businesses in China(Wei, and Xiao, 2014).
Impact of FDI in China on the National Economic Environment (Economic Transition,
GDP Growth, Employment growth, and Corporate Growth)
The foreign capitals contribute to the national economic growth in China by creating a favorable
business environment with the growth in service sectors and increasing numbers of the
manufacturing industries. The FDI in China has contributed developingthe growth opportunities
by creating new employment and income opportunities through the establishment of the foreign
business investment. The Chinese economy grows fast and the investment environment is
continuously improving rapidly through the foreign capitals or funds (Dr. Zilibotti, 2009).

FDI Role in Chinese Economy 8
China is the second largest economy where the FDI inflows and outflows have greatly
contributed to the industrial sector growth (manufacturing and service sector), Gross Domestic
Product (%) growth, and increasing employment with lower unemployment rates. Because of the
large amount of FDI flows (the world’s second highest FDI flows in Dec. 2017), the GDP has
increased at the rate of 6.8% in the first Quarter (1 January- 31 March 2018). The GDP growth
was mainly supported by the major investments, a large amount of exports, and solid
consumption. Because of FDI wars with the USA, the Chinese government is projected to GDP
growth at 6.5% at the end of the year 2018(Buckley, Clegg, and Wang, 2002).
Due to the transition of China to the market-based economy through the foreign investments,
privatization of the businesses and deregulation of the most of trades, the GDP share of China
rose from 2% in 1998 to 14.9% in 2016 that is growth by 3.4% from the year 2012. The FDI
contributed to the national economic growth and GDP by an average increase of 30% annually
from 2013-2016 in China. Because of the high FDI flows, China reached at the second position
in the world economies with the figure of US$ 12,015 billion for the GDP in 2017 after the USA
(US$ 19,391 billion). It is projected to reach or cross the estimated figure of 20.0% by the end of
2025 (Dr. Agrawal and Mohd. Khan, 2011).
FDI in China has accounted for 2.0% of the national gross capital in 2010 as the foreign
investment enterprises have distributed/ supplied almost 0.5% of the fixed asset investment. The
foreign invested enterprises (FIEs) are accountable for almost 51% of its import and almost 49%
of its export as the contribution of FDI in the form of net exports is about 2%. The FIEs largely
contribute to the inbound (imports) and outbound (exports) operations in China. The FIEs
account for more than 20% of total sales, employment, and value-added opportunities in the
industrial sector of China (Ma, 2009).

FDI Role in Chinese Economy 9
The FIEs, like manufacturing industries for telecommunication and electronic equipment
(computer, laptops, mobiles, tablets, and smart TVs), automotive vehicles (like hybrid cars,
classic cars, electronic cars, and hydrogen cars), transport sectors, postal services, retailing
supermarkets, and other foreign businesses are making significant investments into China. Since
observing the industrial sector accounting for approximately 50% of China’s GDP in the
previous few years, the industrial IEEs have contributed almost 10% of the total GDP of China
through the investment operations in China.
The Foreign inbound operation by the FIEs have also contributed to the growth of the economic
activity in China through the global supply chains with the rising flow of goods and services to
meet the growing customers’ needs, expectations, and demands (King and Mallesons, 2018). For
example, the Global Vehicle Automakers, like Volkswagen, Suzuki, Nissan, Toyota, Honda,
Audi, and others have been operating their businesses with different designs and varieties of
vehicles through the FDI operations in the form of direct exports, authorized dealers or
franchised distributors to grow the income of the local Chinese firms as well as the employment
opportunities.
The retailing supermarkets, like Wal-Mart (the USA), RT-Mart (Taiwan), Carrefour China Inc.
(France), Tesco (the UK), Metro Cash and carry (Germany), Lotte Mart China (Taiwan) and
FMCG companies, like Nestle, Unilever, and others have been investing their business
operations into Chinese locations from past few decades through the supermarkets,
hypermarkets, express stores, franchised stores, or dealers’ showrooms that in turn has created
new job offerings to the local residents of China and business opportunities to the local firms or
groups of China(Fetscherin, Voss, and Gugler, 2010). The influence of the physical investments
by the FIEs in the service sector brought to about 33% of China’s GDP and almost 27%

FDI Role in Chinese Economy 10
employment in China. The investment of almost US$ 135 billion by FIEs has contributed to
almost US$ 3.7 trillion in the Chinese GDP.
The foreign investments from the foreign institutional investors or global enterprises have
dramatically changed the Chinese economic environment by supporting the growth of GDP
share, government revenue, employment, and local Chinese business growth. It has contributed
to the government revenue reserves through the foreign investment taxes, tariffs, and earnings
from the foreign firms, employment creation with new recruitmentoffers to the local Chinese
employees, and new income generation to local small firms through the franchised opportunities
for the franchised contracts with the global business enterprises (Shane, 2018).
The FDI inflows from the FIEs have contributed improving the labor market conditions by
providing new jobs to the Chinese individuals for handling different business operations across
the Chinese markets. It has reduced the unemployment rates by 25-30% of total unemployment
rates (3.89% in March 2018) by increasing the ratio for the employed persons at different job
positions in the industrial sectors (manufacturing or service sectors). The FIEs account for 20%
of GDP by employing only 3% of local Chinese workforces (KPMG, 2018). The FDI operations
have brought the economic reforms in the Chinese economy, like diversification of the
ownership structures, establishing market-oriented enterprises, reforms in the structure of state-
owned enterprises, and improving the competition level by reducing the monopolies of the local
brands.
Due to the government support of China and liberalization policies, China has become more
accessible place to the foreign investors for achieving the huge growth in their revenues, profits,
and market share in a short span of time because of favorable conditions and high purchasing
power of the customers here (The Telegraph, 2018). The Ministry of Commerce says that the

FDI Role in Chinese Economy 11
Chinese Government has reduced the restrictions or regulatory barriers on the market access by
the foreign investors because of contributing to the national economic development and
employment sector growth. The Chinese President, Xi Jinping has allowed the increased access
to the FDI by expanding the scope, concept, structure, layout, and system for the FDI. Jinping
has continued to shift FDI focus for attracting the huge foreign investments from the high-end
manufacturing, technological services, and green industries to sustain or promote the growth of
the national economy(Tilburg University, 2013).
FengYaoxiang (The Chinese Spokesperson for China Council for the Global Trade)says that the
global companies from the developed nations, like the USA, the UK, Japan, and Germany have
noticed the changing attitude and trends for the FDI led to more willingness of the Chinese
people to invest into science, technology, engineering, research and development for the high-
tech manufacturing and service sector growth. The national government of China is looking to
evolve the Chinese economy through more market access to bring more opportunities to local
businesses and employment through the foreign inbound operations. The energy, agricultural,
technology, manufacturing and services, telecommunications, chemical industry, and
environment are such industries where are the lots of growth for the FIEs (Tiehang, 2018).

FDI Role in Chinese Economy 12
Conclusion
The FDI plays a major role in booming the Chinese economy by contributing the industrial
growth, service sector growth, new employment and income generation opportunities, wealth
maximization, and government high revenue reserves. China is the biggest developing nation in
the world where the Chinese government supports and promotes both FDI outflows and FDI
inflows to contribute toward the high economic growth with the increased percentage of GDP,
high employment and currency valuation in the global markets.
China is at the second top position after the USA in the list of the highest growing economies
because of the second biggest contributor to the global economic growth. Since the years 2000s,
the FDI growth has placed at a rapid pace because of the increased investments with the
increasing number of foreign firms into China markets as well as promoting the export of the
Chinese goods and services to other countries at the global scale. After looking the exponential
growth for the FDI, the Chinese FDI market is projected to reach at the top position in the world
in the next 30 years by 2050 because of the major exports of the Chinese goods to the rest of the
nations in the world as well as allowing the more investments by the manufacturing and service
industries from other countries.