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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (23562)	2/14/2005 7:21:05 PM
From: RealMuLan	Read Replies (1) \| Respond to of 116555

China bucks global foreign investment trend BEIJING - Annual global foreign direct investment (FDI) dropped from US$1,388 billion to $560 billion between 2000 and 2003. But over the same period, FDI in China grew steadily from $40 billion in 2000 to $53 billion in 2003. Last year, the figure topped $60 billion. Why the steady spurt of FDI in China? A recent report published by the Chinese Academy of Foreign Trade and Economic Cooperation, a think-tank for the Ministry of Commerce, titled the "2005 Report of Transnational Corporations in China", underlines the reasons and lays down strategies for the future. China's investment environment has greatly improved since the country joined the World Trade Organization (WTO) in 2001. China is now attractive to foreign investors because of its stable and increasingly transparent investment environment. It has become a competitive manufacturing base as well as a lucrative and promising market. This has made China an important destination for multinational investments. Since 2001, major multinationals have been adjusting China's position in their global strategies. Many have considerably increased their investments in China over the past three years. Japanese companies are the best example of this trend. Nine major Japanese companies doing business in China have established 200 new enterprises in the nation since 2001. They now not only regard China as an export base, but also a key market and site for research and development (R&D). Many other big companies from the US, Europe and South Korea have also set up new firms in China. Multinationals operating in China concentrated on manufacturing in the 1990s. But intense competition among multinationals and the challenge from Chinese companies has prompted foreign firms to extend their value chain in China. For the upstream, they have started to set up R&D centers and key component manufacturing bases; for the downstream, they have begun to greatly increase their inputs into sectors like sales and logistics. Between June 2003 and June 2004, foreign companies established 200 R&D centers in China. Consolidation moves Multinationals have been adjusting the management structure of their China-based operations. But their methods are somewhat different. Some, such as Japan's Matsushita, put previously independent business units under the umbrella of the company's head office in China. Some, like Finnish company Nokia, merged their manufacturing bases while others, such as French telecommunications firms Alcatel, grew by acquiring stakes in other IT companies. But the common thread that binds all of these activities is the creation of group companies where independent ventures had previously operated. At the end of the day, these firms will operate according to a single goal, a single strategy, a single brand and operations coordinated by the group. Such practices are expected to significantly improve multinationals' overall competitiveness in China. Multinationals' contributions China has absorbed huge amounts of resources from foreign investment. Since China started its reforms in the late 1970s, the country has attracted more than $550 billion in FDI. Annual FDI currently accounts for 10% of the country's fixed-asset investment. Foreign-funded enterprises' exports and imports account for more than half the nation's total; the taxes they pay make up 20% of the total; and they employ about 22 million workers. On the industrial front, foreign companies' participation has spurred the development of many industries, such as home appliances, packaging and logistics. On the micro-economic level, Chinese companies have grown thanks to cooperation and competition with foreign firms. Chinese companies have learned many new concepts from multinationals, such as corporate governance and unfair competition. With the development of manufacturing and services industries, modern industrial workers and professional managers have become new social forces. Now people have broader perspectives and pay more attention to national and global developments. People's values have also become more pragmatic and diversified. Foreign companies, especially multinational ones, have played an important role in bringing about these changes. There have been discussions and debates among researchers and in the media on problems related to China's introduction of foreign capital. Gap between GDP and GNI: Foreign investment has contributed to China's prosperity by driving up growth of gross domestic product (GDP). But the country's gross national income (GNI) has failed to grow at such a rapid rate. This means the country is more prosperous, but not necessarily richer. Some claim that foreign investment is a factor behind this phenomenon. China's GNI lagged behind its GDP every year between 1993 and 2003. This indicates that a part of the value generated in China - about 100 billion yuan (US$12 billion) every year - did not end up being the income of Chinese nationals.It actually flowed out of the country as wealth of foreign citizens. Many, however, believe this is an unavoidable situation and say the gap will narrow as Chinese companies increase their overseas investments and operations. Negative impact on innovation: Foreign investment has long been regarded as a means of upgrading the nation's technological level. But many Chinese academics and managers now complain that this goal has not been met. Though many multinationals introduced state-of-the-art technology to their China operations, many Chinese employees cannot come to grips with the core technology. Chinese enterprises and employees working with foreign companies have not gained much in terms of their research and development capabilities. Foreign automakers, for example, are even accused of discouraging research and development activities in their joint ventures in China. FDI's negative impact on China's technological development can also be attributed to the lack of an institutional framework and policies supporting fair and orderly competition in the market. With the rise of domestic companies, this issue has become more pressing. China is not overly dependent on foreign investment, as indicated by the ratio of foreign investments to GDP and the ratio of foreign investments to total fixed assets investment. For the first indicator, China is on par with the average level of the developing world. If China's GDP is calculated by Purchasing Power Parity (PPP), the ratio for China is just half the global average. FDI's percentage in fixed-asset investment is also below the global average. With the growth of domestic investment, this figure is expected to fall further. In fact, China still has a good opportunity to absorb external resources. With the progress of globalization, many multinationals are regarding China as a link in their global value chain. China is now a market for them. For many of them, China is also a manufacturing base, and to some an R&D and service center. The paper says China should try to maintain foreign investment policy stability during the cycle of economic adjustment, relying more on market-based measures in the adjustments in order to strengthen foreign investors' confidence. Increasing competition from neighboring countries for FDI justifies the maintenance of some preferential policies for foreign investors, it says. "We should bear in mind that China is a country short of natural resources. We have to use the resources we have rich supplies of, such as low-cost manufacturing capabilities and markets - to exchange with other economies for the resources that we lack, such as technology and raw materials. Foreign investment is a key vehicle for this exchange." (Asia Pulse/XIC) atimes.com